Is Compounding 8th Wonder of the World

Do numbers prove? The Albert Einstein famous quote “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”

Compound growth means your interest earns interest. When you have a growing thing, which creates more growing things and again creates more growing things… your return adds up fast. This is the core of all financial concepts.It works for both, one who invests and one who lends or borrows. It is relevant to us as it has the power to convert few 1000s to few Lakhs and few 100000s to few Crores.

This is the core of all financial concepts.It works for both, one who invests and one who lends or borrows. It is relevant to us as it has the power to convert few 1000s to few Lakhs and few lakhs to few Crores.

Legend of the invention of the Chess game: As the inventor of chess asked a small amount of grain as his reward from the King. The King thought that the way was rather modest and the king felt even offended. The inventor asked for grains according to the following formula: 1 grain on the first field of the chessboard, 2 on the second, the fourth on the third, the fourth and so on 8 – doubling in each case – to the 64th field. What was found? So much corn – 18 trillion grains! – Was not produced in all of our country that time! – This is how compounding works.

The Greatest Invention

An old story goes like this. Three friends were having a discussion as to what was the greatest invention. One claimed the steam engine, another the telegraph.

The third friend sharpened his pencil and started to figure on a large piece of paper.

Finally, he said: “Gentlemen if the man who invented compound interest had secured a patent on his idea he would have had without any doubt the greatest invention the world has ever produced.”

If Columbus had placed one single dollar out at 6% interest compounded annually with instructions to pay the proceeds to you today, you would have over Ten Billion Dollars coming to you.

So, compounding is so general but the most important concept. It is overlooked too, as it involves numbers and no one appreciates maths.

Lets me show you some pic-maths and try to gain your attention:

Suppose you were to invest Rs 10000/- monthly.

You had 5 choices to invest:

• Diversified Equity Mutual Fund
• Recurring Deposit RD (Bank or Post Office)
• Public Provident Fund (PPF) Account
• A Conventional Insurance Policy (endowment or money back)
• Gold (Physical or ETF)

What will be your returns after 20, 25 and 30 years?

But what will the rate of return? Historical averages say (CAGR Pre-tax):

• 15.1 % for Diversified Equity Mutual Fund
• 8.8% for Recurring Deposit RD (Bank or Post Office)
• 8.25% for Public Provident Fund (PPF) Account
• 5% for Conventional Insurance Policy (endowment or money back)
• 8.5% for Gold (Physical or ETF)

So this is how the returns will look in 20 Years:

After 25 Years:

After 30 Years:

The gap analysis:

See what an extra 10 or 5 years can do to your portfolio. It can convert Lakhs to Crores and Crores to many Crores.

All you have to do:

• Stay Invested
• Keep Regular Investments Going
• Invest in Right Asset

Hope you are planning to see this 8th Wonder of the World in your life.

Share your thoughts in the comments section and do share this article to your friends and family.