Saturday, June 16, 2012

Astounding Compounding

Who does not know Mr Vishwanatha Anand? Five time world champion in chess, truly a king of the game. Did you ever wonder when and where was the game originated? Who invented this lovely game?

1500 years ago there was a king in India. He set some goals for himself and achieved all of them. Then he became complacent and literally had nothing more to do. The king got bored after some time and he announced that whosoever takes in boredom away will be given any reward which pleases the person.
Lot of musicians, artists, singers and dancers came in the royal palace but none of them could kept the king engaged for long.
Then came a Persian student Sassa with a wooden board with 64 squares in it and few other pieces of wood. He explained the game to the king and soon the king was busy playing this wonderful game with ministers and the queens with their lady slaves. Sassa kept on training people in this game and all the people in the state liked the game very much. Then the student Sassa wanted to go and the happy king asked him: “How can I reward you? Gold or Jewels? Perhaps you want to marry one of my daughters? - the most beautiful one. Choose anything you like.”  Sassa replied "Your Majesty, all I ask for is some grains of wheat. Put 1 grain of wheat on the first square of the board, 2 grains on the second square, 4 grains on the third square, and continue to double the grain on each square until all 64 squares have grain."

They all wondered at how this silly Minister was, since he only wanted a few grains of wheat after winning such a prize. The King Kaid at first thought he'd gotten off easy and readily agrees.
First the King's Ministers sent for a few stalks of grain, then they sent for a few buckets of grain, then they sent for a few bushels of grain and then... they sent for a few fields of grain!! After that, they sent for a Mathematician. The Mathematician told the Ministers and the King that the amount of wheat that Sassa requested would take all of the wheat in the entire world! And perhaps still will not be met. It is multiple times higher than the annual world production of wheat.
Do you want to know how many grains would it take to fulfill this condition? Let us do a quick calculation:
Square 01 = 1
Square 02 = 2
Square 03 = 4
Square 04 = 8
Square 05 = 16
Square 06 = 32
Square 07 = 64
Square 08 = 128
Square 09 = 256
Square 10 = 512
Square 11 = 1,024 (Thousands)
Square 21 = 1,048,576 (Millions)
Square 31 = 1,073,741,824 (Billions)
Square 41 = 1,099,511,627,776 (Trillions)
Square 51 = 1,125,899,906,842,620 (Quadrillions)
Square 61 = 1,152,921,504,606,850,000 (Quintillions)
Square 64 = 9,223,372,036,854,780,000
On the entire chessboard there would be 264 − 1 = 18,446,744,073,709,551,615 grains of wheat, weighing 461,168,602,000 metric tons, which would be a heap of wheat larger than Mount Everest. This is multiple times the global production of wheat.

Yes, this is the power of compounding. ‘The most powerful force in the universe’- as Albert Einstein said it. Really it is astounding.  Mr Einstein also gave a rule to calculate the number of years it takes to double anything which is getting compounded annually. This rule is known as - Rule 72. You simply need to divide 72 with the current interest rate. For example if the rate of interest is 24% per annum, your money will get doubled every 3 years.
If you invest Rs 1 lac on your 25th Birthday and it gets compounded at an annual rate of 24%. You will have Rs 1300 Cr in your account on your 75th Birthday. And if you are lucky enough to live for 100 years, your ATM will show you a balance of Rs 335544 Crore.

That is the power of compounding. The good news is - compound effect is not limited to numbers only. It is equally effective on our choices, behaviors and habits. Small steps taken on consistent basis can do wonders in your life.
Go make the first bang and start harvesting the power of compounding. Remember, early start is the key in compounding. Just to give you a perspective - In the first 3 years the money grew just by 1 lac while in the last 3 years this grew by 167772 Crore.

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