Saturday, September 13, 2008

Are you aware of the Magic of Compounding?

If we could appreciate the “Magic of Compounding” we would understand the benefits of starting early and discipline!

Let us explain the power of compounding with the famous story of the Persian emperor who was so enchanted with a new ‘chess’ game that he wanted to fulfill any wish the inventor of the game had. This inventor, a mathematician, decided to ask for one seed of grain on the first square of the chessboard doubling the amounts on each of the following squares. The emperor, at first happy about such modesty, was soon to discover that the total yield of his entire empire would not be sufficient to fulfill the ‘modest’ wish. The amount needed on the 64th square of the chessboard equals 440 times the yield of grain of the entire planet. Just try converting into money in any currency and you will realize the importance of compounding.

Starting with Rs 1000 and by investing Rs 1000 every month compounded at 10% amounts works out to Rs 78171 after 5 years. In 10 years it more than doubles to Rs 202457. The figures at the end of 15, 20, 25, 30 40, 50 years are Rs 402621, 724986, 1244159, 2080292, 5595607, 1,47,13,428!!

Imagine Rs 100 is invested and it grows at 10% every year. Column 2 is what it will grow to if it was held for the number of years in column 1. So if your great grand father invested Rs 100, 150 years ago, you would have inherited Rs 16 crore.
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