Sunday, October 6, 2013

The Power Of Compounding


Power Of Compounding:- “Interest of Interest ”

As stated by Mr. Albert Einstein: - “The most powerful force in the universe is compound interest”

One of the most basic premises of investing is that your money should multiply manifold over time and this multiplication of money growing is called as “Power of Compounding”

Compounding refers to the re-investment of income at the same rate of return to constantly grow the principle amount year after year, This is the most important aspect to build long term wealth.

When you Invest money, it earns Interest on the same, also if you reinvest the interest earned on your money, 

the interest also generates some interest on the same.....

This is the beauty of compounding,

The best example in compounding scenario is Mr. Warren Buffet.

What does compounding mean to an investor?

All investors investing 5,000 Per Month invested at 8% Per Annum till they reach 60 years of age:-

Investor A :- Age – 30 years – Amount becomes 75 Lacs

Investor B :- Age – 40 Years  - Amount becomes 29.65 lacs

Investor C:- Age – 50 Years – Amount becomes  9.3 lacs

This is a clear example of compounding....the longer you stay invested...the more it grows..

A Short Story :-

THE MAGIC OF COMPOUNDING:


Long time ago there was a King in India who loved to play games. He soon grew bored of all the games played at that time and wanted a new game that was challenging. He commissioned a poor mathematician who lived in his kingdom to come up with a new game. The mathematician invented the game of chess. When he showed it to the king, the ruler was so pleased that he gave the inventor the right to name his prize for the invention. The man, who was very wise, asked the king: "Your highness, if you place just one grain of rice on the first square of this chess board, and double it for every square, I will consider myself well rewarded." "Are you sure?" asked the king, greatly surprised. "Just grains of rice, not gold?" "Yes, your highness" affirmed the humble man. "So it shall be" ordered the king, and his courtiers started placing the grain on the chess board. One grain on the first square, 2 on the second, 4 on the third, 8 on the fourth and so on. By the time they came to the 10th square they had to place 512 grains of rice. The number swelled to 5, 24,288 grains on the 20th square. When they came to the half way mark, the 32nd square, the grain count was 214, 74, and 83,648- that is over 214 crores! Soon the count increased to lakhs of crores and eventually the hapless king had to hand over his entire kingdom to the clever mathematician. And it all began with just one grain of rice!
Happy Investing J





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