the power of compounding

In your childhood, you must have saved your money in your piggy bank. When you used to break the piggy bank then you used to be happy. Right! So this is the power of saving. When you regularly save your money for a longer time. Then you know that over some time you end up saving a lot of money and that sum of money gives you excitement. But the power of compounding is even more than this.

Einstein has once quoted that compounding is the eight wonder of the world.

If you want to use the power of compounding then you should invest your money in the right place. Different investment instruments such as the stock market, mutual funds, and various other options can compound your money. But this is not that, by using compounding you can always grow your money. If you don’t properly invest your money then you can lose money in an exponential way too.

But if you learn about the investment options and gain knowledge and experience then you can consistently make an exponential return from the miraculous power of compounding. If you want to learn about the stock market from me then join my community and I will be guiding and mentoring you to learn about the stock market. 

Now let’s jump to the main topic of the power of compounding and let’s understand it in detail.

I will mention some stories and some scientific proof to show you the power of compounding. I will not only show you the positive side of it but I will tell you about its downside too. So that you get a complete understanding of this.

The power of compounding by a story

Once upon a time, there was a king. The king was very fond of music and he was a great music lover. One day a great singer came to his court. He sang a melodious song for the king. The king got very fascinated by his singing. The king got so impressed that he said to the singer “ I am very much impressed by your singing, ask me whatever you want”.

The singer was a very wise man. He said to the king “Maharaj, I don’t want much. Just give me some rice grains.” At this, the king replied to the singer and said “Tell me how much rice grain do you want.” He said “Maharaj just put one rice grain in the first box of the chess and double it in each box. The amount that you will put in the last box, I want only that much of the rice grains”

The king smiled and said, “ You have asked for a very simple wish, I will complete it today itself”. 

What do you think🤔? Was it just a simple wish? Let me narrate the story and that will make you understand whether this was a simple wish or not.

The king ordered his guards to bring a big chess board and rice grains. He ordered the servants to put one rice grain in the first box and double it in each box. For your knowledge, I want to tell you that there are 64 boxes on the chessboard. The narration of the story ahead is very clear from the given table. 

power of compounding

From the picture, you can see that there is exponential growth in the rice grains in each box. If I bring some maths here then the rice grain in the boxes is growing with 2 to the power n, where n is the box number. You don’t have to see the complex mathematics involved in this. Just see in the end box how much rice grain is present. This amount is 92237x 10^14( I have written in this way for the sake of simplicity in calculation).  The numbers are mind boggling 🤯. Right!

 Let us make it more simpler. In general, there are 50,000 rice grains in each kg of rice. So according to this the weight of total rice grains is 1.8* 10^14 kg which is to be given by the king to the singer.

Let us realise the above amount in real money. In general the price of 1 kg rice is Rs. 30 per kg. So the value of the rice grain will be Rs. 92.325* 10^14. In dollars this amount will be 79.2 trillion dollars. In 2017 the world GDP was around 80 trillion dollars. So you can see how big the amount was! 

Now the king was amazed to see that he didn’t have that amount of rice grains in his entire kingdom. And he finally gave up and said that ” Dear singer, sorry but you are really very wise and I won’t to able to complete your wish”

So the moral of the story is if you invest your money and get a compounding return each year then you can imagine how much return you can get over a period of time. It is sure that like this story your money will not get doubled each year. This means you may not get 100% return each year from your investment. But even if your money increases with an average annual rate 15 to 20 percent. Then over a period of 10 to 15 years you will observe an exponential growth in your money.

The power of compounding in real life 

Now let us consider that you start investing from the age of 25 years. Each year you invest Rs. 20,000 money. Let us consider that your investment gives you an average annual return of 15%. Now you may ask which investment can give me an average return of 15 to 20 percent each year. Then my answer is that stock market and mutual funds and there are various other investment instruments that can give you an average annual return of 15 to 20 percent and even more than this. But this is not so easy. To generate such a consistent return you must have to seek the right knowledge about these things. If you want to get help from me then join my community.

So let’s continue our discussion. So you have started investing from the age of 25 years and you are expecting to get a return of 15% each year.

Now till the age of 40 the total amount of money you will be investing will be Rs 36,20,000. But because of 15 percent annual return you will get Rs. 1,15,82,039.84 which is more than 1 crore. This is one of the perfect example of building wealth.

The table is given in dollars but you can ignore it. Consider the given values in ruppes.

The table shows the growth of money with 15 percent annual return.

Now to reap the maximum benefit of compounding. You need to understand that this compounding depends on two things: one is how soon you start investing your money. This means it is dependent on time and how much return you are getting each year. The earlier you start investing your money the more return you can get.

Compounding is dependent on time

Now the first thing which matters most in compounding is time. Let me demonstrate this with a simple story. Ram and Shayam are both friends. Ram starts investing Rs. 24,000 each year at an early age of 21 years. He continues to invest till the age of 27 years. So the total money he invested is Rs. 1,68,000. But he was getting a compound annual return of 15 percent. So till the age of 27, he will have Rs. 2,65,603.18. Now, he stopped investing the money yearly in his investment. But he did not withdraw his money from the investment that he had made. He kept his money invested till the age of 45 years. So at the age of 45 years, he will get Rs. 24,85,413.86.

On the other hand, his friend Shyam didn’t invest his money till the age of 27. After getting 27 years old he started investing his money. He also started investing Rs. 24,000 money each year. He continued to invest till the age of 45 years. So in total, he invested Rs. 4,56,000 money. The money was growing with a compounded interest rate of 15 percent. So till the age of 45, he will accumulate Rs. 24,58,665.98.

You can see clearly that at the age of 45 Ram will have more money than Shyam. An important thing that should be noted here is that Shayam regularly invested for 19 years and invested almost double money than Ram but even though Ram has more money. What made Ram get a greater return on his investment? So Ram got a greater return on his investment only because he started investing his money from an early age.

So early investment is very important. Do you know that Warren Buffet, who is one of the most successful investors, started investing at a very young age of 11 years? But even though he says that I started investing very late in my life. Before that, I was just wasting my time.

This is the reason that I say that learning about investing is very important for students. If you want to know why investment is important for students then you can read this article which will make you understand that why investment is important and what are the different investment options available for students and how they can start their journey of investment.

Compounding is dependent on rate of interest

 The second one is the rate at which your money compounds each year. Here I want to make you cautious that don’t run to get more returns each year. As this can make you greedy to get more and more returns to make more money. And often greed can lead you to make wrong investment decisions that can lead you to lose your money. A return of 15 to 20 percent is considered a good annual return. I am not saying this, this is said by some most successful investors. And this is very true.

The downside of compounding

This is not that compounding is always helpful and will bring positive returns for you. Positive compounding is miraculous then negative compounding is even more catastrophic.

Let us understand this with an example. If you invested your money and expected to get a positive compounding. But if you don’t gather adequate knowledge and jump into investing directly, just with the greed to earn more returns. Then it is very much possible that you will make a wrong investment decision and you will invest your money in the wrong place.

And let us suppose you invested 100 rupees and in the first year it got decreased by 50 rupees. Then your investment fell by 50% percent then to again get back your Rs. 100 you don’t need the return of 50 percent instead of this you need the return of 100%. So you can see that if your investment fell by some percentage. Then you need the return of double of that percentage from your investment again just to recover the money that you invested.

So right knowledge is very important before investing your money.

Note; If you want to open a demat Account. Then read this article that will help you to make a right decision.

Conclusion

So the gist of the whole article is that we often ignore the power of compounding for growing our money . The one reason for this could be that most people don’t know about it. So through this article I tried to explain its power.

If you really want to reap its benefits and are willing to build wealth for yourself, then do join my community GROWTH SEEKERS. Join the group to know more about it.