We can best understand the power of compounding with stories and puzzles. That is to say, stories are made for entertaining you, and puzzles to puzzle your mind. Let’s understand the power of compounding with a story first and a puzzle next.
A small story on the power of compounding
The king and the farmer
Once a powerful king lived in an Indian state. Moreover, he was fond of playing Chess and liked to reward the champion. However, a farmer was living in a destitute with his family in the same state. Thus, one day, his wife requested him to pay a visit to the king and ask to help them. But, the farmer did not like the concept. So, he did not pay much attention to that. One day, he heard an announcement that the king was arranging a Chess tournament and would reward the champion whatever he or she would want.
After that, the farmer decided to visit the king the next day, because he was an expert in Chess. When he reached the royal gate, he registered himself as a player and entered into the royal palace. On the other hand, he got surprised that a lot of people participated in the game. However, he was confident that he would get the championship.
The match began
The first round of the game started on time, and the farmer won it. The second round then the third, it continued. He never lost the winning streak. And in the last series, the king was the opponent of the farmer. It was a tough game, but at last, the farmer won the match and became the champion. Indeed, the king became surprised that a farmer won the game.
Then, it was time to pay him the reward. Therefore, the king called the farmer and asked about his wish. But, to everyone’s surprise, he wished only a grain of rice and doubled the amount of grain in the next box of the Chessboard. The king was a generous one. So, he asked the farmer if he wanted to modify his wish. But, the farmer stood on his preference.
Chessboard and the grain
As per the king’s order, a soldier put a single grain in the first box of the Chessboard. Then two grains in the following box. After that, four grains in the third box and the process continues. Soon, the king realized that he had made a mistake. Thus, the rice grains were piling up. Soon, more soldiers were employed to bring rice grains, and in a few hours, the royal granary got emptied. Meanwhile, the king ordered to loan more grain bags from the people of the state. However, by the end of the day, all that exhausted.
Further, he realized that he had made a grave mistake by agreeing to the farmer’s wish. He tried to sell his gold to import grains from his neighbor countries but in vain. As most of the states were suffering from a famine-like condition, therefore, there was a shortage of grains everywhere.
The king bowed down before the farmer.
There were ten more boxes left in the Chessboard. Thus, the king bowed down before the farmer as he had no other option and asked the farmer to take his kingdom and make him a slave as he was unable to fulfill his wish that he had promised. But, the farmer was an honest man, and so he asked the king to send a few grain bags to him and distribute the remaining to those farmers who were struck by the famine. Likewise, the king assured him that he would never allow his fellow beings to starve anymore. Consequently, the farmer won the hearts of the audience, and all of them wished him good luck.
Let’s understand Math.
The Chessboard has 64 boxes (8*8). Thus, putting a single grain in the first box and then doubling the number of grains in the following boxes means a total number of 18,446,744,073,709,552,000 (18.4 Quintillion) grains.
After a little bit of tedious calculation, I found that the value of those grains becomes 163.9 trillion-dollar. And for your kind information, the Internation Monetary Fund estimated the world GDP at 87 trillion-dollar for the year 2019. Thus, the value of those grains would be around 2x of the current world GDP. That’s a fantastic figure. Isn’t it? That’s a tremendous story on the power of compounding. I have inserted a calculation sheet below for your reference.
A Puzzle on The Power of Compounding
There were two close friends Asit and Amit, who completed their studies and tried their luck in Mumbai. Meanwhile, both of them got a job at a multi-national company. Thus, for a few months, they lived in a rental apartment. Soon, a small dispute separated them, and they started to live separately.
The lifestyle of both Asit and Amit was different. Asit imitated the lifestyle of the rich. Thus, attending parties on weekend days and having lunch with colleagues at star hotels was common. In short, he was living an extravagant life with no savings.
On the other hand, Amit was maintaining a simple lifestyle. He was living in a shared apartment and preferred to eat at home. Further, he was using public transport to commute to his office. Thus, he was able to save Rs 10,000 from his salary and invest it wisely.
Ten years passed this way, and each of them got married. The life of these guys took a U-turn after that. Asit began to save for the next 25 years, but Amit could not keep a single penny due to some medical conditions in his family. However, Amit did not withdraw that money until his retirement.
After 35 years, both retired at the age of 60. Who do you think might have accumulated more wealth at the time of retirement?
Data in a tabular form
|Got a Job at the age of||25||25|
|Saving Started at the age of||35||25|
|Saving Stopped at the age of||60||35|
|Amount Invested per month (Rs)||10,000||10,000|
|ROI (Return on Investment in percentage)||12||12|
|Retired at the age of||60||60|
TABLE NO – 2
Amit invested for ten years and Asit for 35 years. To clarify, Amit invested only Rs 12,00,000 (10,000*12*10) during his lifetime, whereas Asit invested Rs 42,00,000 (10,000*12*35). Therefore, it looks obvious that Asit will accumulate more money at the time of his retirement than Amit. Let’s calculate.
Asit started to deposit at the age of 35. Thus, he deposited Rs 10,000 for the next 25 years at an interest rate of 12% per annum. That is to say, he accumulated Rs 1,70,40,068 (Total deposit Rs 30,00,000 plus interest Rs 1,40,40,068). That’s a huge amount.
Take the case of Amit. He deposited Rs 10,000 for the first ten years at an interest rate of 12% per annum. Thus, at the end of 10 years, he accumulated Rs 22,42,728. However, he left that money to grow at a rate of 12% for the next twenty-five years. Therefore, the final amount of his retirement would be Rs 3,81,26,520 (Total deposit Rs 12,00,000 plus interest Rs 3,69,26,520).
Amit became a clear winner. Because he accumulated 2.2x or 123.75% more than Asit though he had deposited 71.4% less, that’s the power of compounding.
The Moral of the power of compounding story and puzzle
What did you learn from the story and the puzzle on the power of compounding? ‘Time’ is one of the most significant factors to harness the power of compounding. Thus, the more time you give to your investment, the better it grows, just like a plant. Therefore, it does not matter how much money you save, but when you start. To conclude, I will say that if you are a young earning person, then delay your gratification to save as much as you can and put it into the right investment option where the risk-reward ratio is favorable to you. However, to get a better return, you may have to learn a few basics of investing. Thus, give your time and money to learn those basics to maximize your profit.
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