8th Wonder of the World : "Compound Interest"

As all we learned compound interest, just as a formula for calculating the sums during our school days but never use it in our practical life. If we just analyze how it works in our daily life, it shows tremendous result. I show you how it work and its impact on our life, if we use it for investing: -

It forced me to think about investing, when I read a story in newspaper. It was the 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. You can also calculate it by a simple formula, which we taught in our high schools. For those more mathematically inclined, I state below the formula:
Vn = Vo * (1+r) ^n
What it means is that: The amount of money that you require (Vn) is equal to the amount invested today (Vo) multiplied by [1+ interest rate (r)] raised to the number of times the amount is compounded (n).

Let’s take an example:
If you can invest Rs. 1000 in any fixed deposit plan which gives you 10% p.a. interest and do not touch the amount for a long time. Can you imagine what amount your son or grand son receives after 50 or 100 yrs?

1 year @ 10% p.a. it becomes Rs.1000
5 year @ 10% p.a. it becomes Rs.1464
10 year @ 10% p.a. it becomes Rs.2358
15 year @ 10% p.a. it becomes Rs.3797
25 year @ 10% p.a. it becomes Rs.9850
50 year @ 10% p.a. it becomes Rs.106719
100 year @ 10% p.a. it becomes Rs.12527829

Look how your investment or just Rs.1000 becomes 1.25cr. in 100yrs without doing anything.


Do you know that what is the impact on your investment of Rs.1000 if the rate of return is 9%p.a. instead of 10%p.a.? I show you what 1% rate of interest can do it, if it is compounded on annual basis.

1 year @ 10% p.a. it becomes Rs.1000 but @ 9% p.a. it becomes Rs.1000
5 year @ 10% p.a. it becomes Rs.1464 but @ 9% p.a. it becomes Rs.1412
10 year @ 10% p.a. it becomes Rs.2358 but @ 9% p.a. it becomes Rs.2172
15 year @ 10% p.a. it becomes Rs.3797 but @ 9% p.a. it becomes Rs.3342
25 year @ 10% p.a. it becomes Rs.9850 but @ 9% p.a. it becomes Rs.7911
50 year @ 10% p.a. it becomes Rs.106719 but @ 9% p.a. it becomes Rs.68218
100 year @ 10% p.a. it becomes Rs.12527829 but @ 9% p.a. it becomes Rs.5072514

See what 1% can do if it is compounded on yearly basis. Impact on your investment is more than twice in 100 year by only 1% difference of interest rate.

Think if Rs.1000 (one time investing) becomes 1.25 Cr. in 100 yrs. Think if you invest Rs.1000 p.m. (it may be equal or less than 10% of your monthly salary) and on the same you get compound interest on monthly/yearly basis, how much it will be in 10 or 20 years.
Moral of the Story is ; "Instead of worrying about 'r', just start investing on regular basis. That is the key".