The magic of compounding part 2

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When I was a kid I had read a story about how a king had lost his Empire to a hermit. The story was something on the following lines (i don’t remember the exact story)

The hermit defeated the king’s team in some kind of a debate. The king asked the hermit to name what he wanted as his prize. The hermit intern said that the king would not be able to give the prize that he wanted.

This hurt the king’s ego…. so he insisted that the hermit ask for for the gift

The hermit asked the king to bring a chessboard (for those of you who have not seen a chess board it has a total of 64 squares) and said that for each square on the chessboard he will double the number of grains and whatever is the number of grains till the 64th square the king will have to give.

The king thought that this is a very small thing and agreed instantly. So a chess board was brought and the king asked for the grains to be brought. The hermit put one piece of grain on the first square of the chessboard, on the second square 2, on the 3rd he put 4 on the 4th he put 8 and after that 16, 32 and so on.

By the time the hermit had reached the 8 square the number of grains on the 8 square were 256. The king was still ok, however by the time the hermit reached the 16th square the number of grains were 65536. Even now, the king, while he had started getting a little concerned did not bother too much about it and kept asking his people to bring in more grains

By the time the hermit reached the 24th square the number of grains had become 1 crore 67Lakhs (16 million approx) and by the 32nd square the grains had become 429 crores 500 lakhs approximately (in terms of billions this was close to 4 billion grains).

At this stage the king actually started getting worried because now his graneries started getting empty each time the hermit moved 1 square more. By the 64th square the king had to ask all his neighbours for grains

Would you be able to guess what was the number of grains at the 64th box– it was close to 2000 trillion grains. Just for discussion if 1 piece of grain is 1 gram, then the above is 2 trillion kilograms of grain. No wonder the king lost his kingdom, he did not know the power of compounding.

So what does this have to do with compounding – 2 things which I spoke last time –
a. Even if the starting of the grain of your money is only one but you let it grow for a long time then even that 1 Rupee (or 1 dollar or whatever currency you use) can become a very large amount – the hermit had 64 squares of the chess board to grow the number of grains

b. The second is the rate of interest – in this case the hermit had a hundred percent rate of interest so from the first square he started with one grain, went to 2, 4, 8, 16 etc. – when you have a high rate of of interest even a small amount will grow to become huge.

Which brings me back to the equation I had written the last time
S=P*(1+R/100)^N
S= sum of money
P= Principal amount
R=Rate of interest
N=Number of years
So even if you start with a small amount but let it stay for a long time with the right interest rate, you would become rich.

While I read the story as a kid, I learnt the lesson just a few years back(slow learner) ….since then am trying to make others understand, but ….

Till next time….

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