When we invest early in our lives, the amount keeps growing at a specific interest rate. At the time of maturity, it becomes a big chunk
Long back, when the inventor of the chess showed the game to an Indian king, the king was so impressed by the new game, that he wanted to reward the inventor. At that time, the inventor replied, “My wishes are simple. I only wish for one grain of rice for the first square of the chessboard, two grains for the second square, four grains for the third square, eight for the fourth square and so on for all 64 squares.”
The inventor said, “Please double the number of grains in the next square compared to the earlier square.”
The king was amazed to hear that the investor had asked for such a small reward. He happily agreed to the inventor’s request. However after a week, the king’s treasurer informed him that the reward would add up to a huge number—far greater than all the rice that could possibly be produced in many centuries!
Do you know how much rice it would be when one reaches 64th square of the chessboard?
As said earlier, in the first square of the chessboard there is only one grain. But when you come to the 64th square, it is 18 million trillion grains of rice. This is more than enough to cover the entire surface of the earth.
All of us behave like the king in some ways or the other. We find it hard to understand how the ‘power of doubling or compounding’ makes numbers grow.
Moral of the story
Start investing early
Don’t touch the amount for a long time
Don’t keep jumping from one investment to another
Let’s take an example to understand the importance of investing early and benefits of compounding. Nirav and Ajay start working at the age of 20. Both join the company at the same time.
Case 1 (Nirav)
Nirav understands the importance of investing early and benefits of compounding. He spends less money on entertainment and makes sure that he is investing Rs. 50,000 every year.
Nirav gets 10% return on his investment every year. At the end of 10 years, the accumulated amount is Rs. 7.96 lakh. However, due to some financial responsibilities in his family, Nirav is unable to save money now and whatever he salary is used for household expenses.
He doesn’t touch the accumulated amount. He keeps the amount (Rs. 7.96 lakh) as a fixed deposit in a bank at 10% interest rate till he gets retired at the age of 65. Nirav does not make any fresh investment. The interest keeps on accumulating on Rs. 7.96 lakh till 35 years. Thus, when at the age of 65 years, he gets Rs. 2.23 crore.
Case 2 (Ajay)
Ajay spends a lot of money and doesn’t believe in investing early. He starts investing after 15 years when he is 35 years old and invests for next 30 years. He regularly invests Rs. 50,000 each year till he is 65 years old.
Ajay also gets a return of 10% per year. At the age of 65, he gets a maturity amount of Rs. 82.24 lakh.
Nirav invests regularly for only 10 years but Ajay invests regularly for 30 years—20 years more than Nirav. However, Ajay gets Rs. 1.41 crore less than Nirav. This is almost 63% less. Therefore, it is important to invest early to get the benefit of compounding.
When we invest early in our lives, the amount keeps growing at a specific interest rate. At the time of maturity, it becomes a big chunk. This is because the growth in amount every year is lot more, compared to the initial years.