Yes! You read the title correctly! You might be wondering what is the eighth wonder of the world? To put that into perspective, let us go through a story.
Once there was a king who was very rich, probably the richest in the world. He was once presented the game of chess by an inventor. The king was impressed by the inventor and offered the inventor any prize that he wanted. The inventor asked the king to place a rice grain on the first square and place twice the number of rice grains in the subsequent square as compared to the previous square. That means two rice grains in the second square, four grains in the third square, eight in the fourth square, and so on till the sixty fourth square, doubling the number of rice grains with every square. The king, who was baffled by such a small prize for the invention of a wonderful game, asked the inventor, “You sure you want only rice grains and not something else like gold coins?”. “Yes I want only rice grains”, replied the inventor.
The king ordered his servants to place rice grains as per the inventor’s wish. After some time, the amount of rice grains had become so big, that the entire supply of rice grains in the kingdom was used. Calculations showed that if they were to continue till the sixty fourth square, the total amount of rice grains on the chessboard would have been 18 quintillion. That is eighteen zeros after the number 18! The total worth of these rice grains in today’s terms would have been USD 300 trillion, which is more than the GDP of the whole world!
Let’s understand compound interest with another story. There are two very good friends, Sonu and Monu. Both of them graduate at the age of 22 and get into a job with a decent salary. Sonu, having a saving mindset, and knowing that he doesn’t have much responsibilities, manages to save Rs. 5000 per month and puts those in an index fund, and keeps on investing for the next 10 years. Now when he becomes 32, he stops investing, enjoys life, and lets that money compound until he retires at 60.
Now let’s come to Monu, who loves to live a lavish lifestyle, always buys a new phone, and lives on a credit card. He doesn’t make any investments. After 10 years, he realises that he needs to invest for his retirement. He also starts saving Rs. 5000 per month, but he decides to continue till he is 60. Now, Monu has invested almost 3 times his friend Sonu. But there is a huge difference in the final amount of them. Monu has built a total wealth of a little more than Rs. 2 crore. Meanwhile, Sonu has amassed around Rs. 6.5 crore.
Rate of return of both of them is the same, 15%. Monu has invested almost three times the amount that Sonu has invested, yet the final amount Sonu has is more than three times than that of Monu. What’s the catch here? Compounding is at play. The earlier you start, the merrier it is for you.
The main lesson I want you to learn from these two stories is to start investing your money as early as possible in your life, even if it is a tiny sum. If you think what effect a small amount will make, just remember that it all started with one rice grain.
If you want to understand compounding better, you can take a deep dive by reading The Compound Effect by Darren Hardy, who has explained this in very simple terms. By reading this book, you’ll not only understand about the compounding effect in money, but also in many other things which you can apply in your life.
I hope this article would have encouraged you to start your compounding engine!