The ultimate mathematical find out of all times is Compounding. And some even believe that the most powerful force in the universe is compounding. The following quote helps you to understand the power of compounding.
“Compound interest is the eighth wonder of the world. He who understands it earns it, he who doesn’t, pays it”.
Albert Einstein
Consider you have invested Rs 1 lakh at a 10% rate of interest per annum for 5 years. Now at the end of 5 years, your 1 lakh became 1.61 lakh. Now can you guess after 10 years, 25 years, and 50 years how much your 1 lakh would become at the same 10% rate of interest?. And if your answers are 3.22 lakhs for 10 years, 8.05 lakhs for 25 years, and 16.1 lakhs for 50 years. Then you should yet to know the power of compounding. The correct answers are 2.59 lakhs for 10 years, 10.83 lakhs for 25 years, and 117.39 lakhs for 50 years. And that’s the power of compounding.
| Years | Rate of interest in % | Matured amount |
|---|---|---|
| 1 | 10 | 110000 |
| 5 | 10 | 161051 |
| 10 | 10 | 259374 |
| 15 | 10 | 417724 |
| 20 | 10 | 672750 |
| 25 | 10 | 1083470 |
| 30 | 10 | 1744940 |
| 35 | 10 | 2810243 |
| 40 | 10 | 4525925 |
| 45 | 10 | 7289048 |
| 50 | 10 | 11739085 |
Power of compounding
This story will further help you to understand the power of compounding. Once there was a king, famous for his love of chess, and challenge wise visitors to play a chess game against him. The king would gift treasure or any valuable prize if the challenger wins over in a chess game against him. One day a sage reached the king’s territory, the sage was invited to play chess against the king.
Before the game starts the king asked the sage wished reward if he wins over the king. The sage asked for few grains of rice placed on the chessboard in the following method. Each square in the chessboard should have double the quantity of grain than its previous square. So in the first square, one grain of rice is placed. Two grains in the second square, four grains in the third square. And a fourth square will have eight grains this goes on.
The king accepted and they started to play chess. Surprise to everyone the sage won the king in the chess game. The king brought the bag of rice as a reward to sage. And he began to place the grain of rice on the first square as per their deal. but after some time the king began to realize that he could not give the grains. The exponential growth is more than his assumption. On the fortieth square, the king required 1,000,000,000 grains of rice. And on the sixty-fourth square, he required 18,000,000,000,000,000,000 grains of rice to give as a reward to sage.
Simple Interest VS Compound Interest
Now you can understand the power of compounding. If you invest Rs 1 lakh in fixed deposit for 10 years without taking out interest is an example of compound interest. And if you invest 1 lakh in fixed deposit for 1 year and after 1 year you withdraw the interest amount. Again invest 1 lakh for 1 year. And repeating this process of withdrawing interest every year is an example of simple interest. It may look simple but its impact is huge. In compound interest, 1 lakh invested at 8% per annum for 10 years is 2.15 lakhs the same in simple interest is 1.80 lakhs.
Compounding in simple terms is consistency with small growth, how small the growth may be. Because a small beginning is the new big thing. Have you heard about the story of the tortoise and the rabbit?. The tortoise won the race because of the consistency.
Also Read : The Rule of 72 – predict when your money will be doubled.
Compounding is present everywhere. A good relationship is one in which love is compounding. And you don’t build a fit body in a single day or month, it takes several months if you exercise. You can experience the impact of compounding only after a long time. The rule of 72 will help you to predict when your money doubles through compounding at a given rate of interest.
