Power of Compounding!!!

Have you ever wondered what is the meaning of the term "power of compounding" which is often used by investors.

In this am going to share my knowledge on compound interest and how your money will grow due to this
principle of compounding.

Recently one of friend asked me what interest rate banks are giving on fixed deposit for short term.
I replied to him like it depends on bank to bank , the average return can be around 9-10.5%.

He also said that he want to invest his money (rs.25000) in FD for 1.5 yrs.He made a rough calculation on how much he will get for one year keeping the interest percent of 10% for easy calculation.It came like 2500rs and he was happy on getting that as interest for his idle money which he don't want to invest in mutual funds or equities due to the current market situation (Basically he is a conservative person).

While discussing this interest rates he suddenly asked me like what will be my balance if i invest this money in bank FD
or left the money in SB account and die or take after 100 years .I answered to his first question immediately like your nnominee can claim the amount incase of your death ,so it is not a big deal.But while answering the second question he was really shocked.
Then only i realized like many people even now doesn't know about a concept called "power of compounding".

Gave too much hype on this concept , Let me explain about it :

Normally the interest rate we get from banks is 10% , so when we invest 1000 rupees for one year we will get interest of
100rs and this will again add to the principle (1000rs) thereby your total amount for the next year to calculate interest is 1000+100 = 1100 rs (principle+interest).
Good this everyone knows , so whats new!!!

The thing is this amount which you invested (1000rs) will become double in 7 yrs(calculating rate@10%) .So by the end of
7th year you will have 2000rs.Which when you see interms of amount, is less but this is the power.

okay lets see what will happen after 100 years???
1000 - 1st year
2000 - 7th year
4000 - 14th year
8000 - 21st year
16000 - 28th year
32000 - 35th year
oh my fingers are paining!!
64000 - 42nd year
128000 - 49th year
Is this true ????
Don sleep still your money is batting
220000 - 56th year ..... okay just checked 256000 - 56th year
612000 - 63rd year
This time really my hands are paining!!!

so you calculate rest...

I finished my speech to my friend by saying this short story :
Once upon a time (in china , in india , in US) wherever you want there was a king whose daughter was very ill and he announced (don have much time so shortening) like whoever saves his daughter that guy can marry his daughter as well as he can ask whatever he wants from king.(generally doctors are guys at that time)Many tried but failed finally one guy (chitti the robot) came and gave some medicine (Gelusil antiacid tablet) and cured that girls disease.So they arranged for celebrations (okay too much) now its his turn to ask the king for some dowry (don register case on him)
He asked the king to bring a chess board and asked him to place two grains in the first square , four gains in second and asked him to go in the same way till 64 squares (that much squares only thr).When he reached 32 squares he lost all his money and kingdom , when he reached 38 all his friends lost their kingdoms and finally he understood the power.This is the concept of compounding .. So Let the money make the talkings.

People will ask whether will they live till hundred years ., surely no but your child will or your grand child will...
Nowadays people are saving for their next generations only rt?
So just a sum of 1000rs will make you ambani in 2100 (not you your grand son).
Don think of inflation n all it will rise only if all in the country thinks about their growth ., till people works for daily wages our countries will be having more people below poverty.

So now think what will be your net worth if you get good returns like 14-17% from mutual funds and equities ., For knowing them read the other posts :P

people who don want to take risk can readily invest their money in FD's or PPF's with tax savings(View post about PPF for more details).

Please give your comments if you like the post !!!
Srivatsan