Power of Compounding

 

Many hundreds of years ago an inventor of chess board game introduced the game of chess to a wealthy king. The king was so pleased to see the beautiful game, he asked the traveler to name any reward.

The traveler said ‘All I ask for is some wheat. Just one grain on the first square of the chess board, two on the second, four on the third and so on, for all the squares on the board’.

The king, thought this was a modest request and quickly granted it and amazed that the man had asked for such a small reward – or so he thought.

 After a week, his treasurer came back and informed him that the reward would add up to an astronomical sum, far greater than all the rice that could conceivably be produced in many many centuries! the king soon realized that there was not enough wheat in his entire kingdom, or even the world, to meet the agreed reward.

The number of grains of wheat on the last square can be written as “2 to the 63th power”, or “2 times itself 63 times”, or                                         

                             18, 446,744,073,709,551,615 grains of wheat!!! ( 1200 times of global wheat production)

 

The tale be it factual or not , is often used by mathematician to explain the power of compounding

 

The wonder of compounding (in investing terms) is to make your money work, to transform it into a state-of-the-art, highly powerful income-generating tool. Compounding is the process of generating earnings on your asset's reinvested earnings. Compounding works on two basic premises: re-investment of earnings and time. 

 

Simply put, the longer time you leave your money to compound, the higher is the wealth you generate.