Albert Einstein stated Compound Interest is the eighth wonder of the world, one who understands it earns it & others pay it. In this article, we will explain the power of compounding using an interesting story. After that, we will talk about how we can use compounding power to our advantage and create wealth out of it.
Before we deep dive into the advantages of compound interest. Let me tell you an ancient Indian Rice and Chessboard story that explains the power of compounding. Once upon a time, there was a king who got impressed by the chess game. He made an offer to the game creator to ask whatever he wanted, and the man responded this way –
“Oh, my king! all I want is one grain of rice for the first square of my chessboard, two for Second Square, four for Third Square, eight for Fourth Square and so on for all 64 squares of the board”.
The king got amazed by his wish and asked the minister to collect the grains the man asked. But the king is about to learn the lesson of compounding power from that man. Few weeks passed, but the minister does not return to the court. So the king asked him to return immediately and asked about the grains. The minister replied – Oh my lord! we sent people to collect the grains but we could not able to procure all the gains the man asked.
So readers, what you think why this minister failed to accomplish such an easy task? Because it is not as easy as it sounds because of the power of compounding. If we calculate all the grain required for the man, the number will be like this “18,446,744,073,709,551,615”.
Let us learn now how to make your money work for you with the help of compound interest. All you have to do is invest Rs.10000 as the base amount and deposited Rs.5000 per month for 20 years. Let us assume that this amount is compounded annually with a minimum return of 15%. At the end of the 20th year, the final amount would be Rs.68 lakhs (6,799,032.58). Thanks to the compounding power.
If you observe the table, the total amount you deposited is around Rs.12 lakhs. The interest earned was around Rs.55 lakhs for 20 years. I hope now you can understand what compound interest can do with your money.
Now, the question that will be running in your brain would be – “Who will give a return of 15% that compounds annually?” No banks will give such returns. But many companies grow more than 15% annually in India. If we invest in stock market listed companies, we can expect the returns as mentioned in the above table. Here is the caution investing in the stock market involves risk. Understand it before making your first step of investment.
In our upcoming posts, I will explain how to find companies that give good returns. Use our finance calculators to make your life easy.