The Power of Compounding

Investor gaining profit from investment

Once upon a time, … Oh! Wait! Just so you know, this is an article about compounding, or even better: this is A STORY about compounding. And this article, this story has many lessons with it. Even if you’re not interested in finance or investing or money at all, this story can change your perspective which can change your life.

Let’s do it again.

Once upon a time, there was a king.
He had a happy kingdom, and he loved his queen.
But more than his queen, he liked playing chess.
He was so into it, he wanted to see the inventor’s face.

So he sent out a word to meet the person who had invented chess. The king said that he’d reward the inventor of chess with anything they desired. The word was spread throughout the kingdom and even beyond the kingdom. After about two days, the inventor came to meet the king. The king assured the inventor that he’d give the inventor any reward that he wanted.

The inventor said, “Some grain of rice is all I want, my lord.” “But I want the grain of rice in such a way that a single grain of rice be placed on the first square of the chessboard. Then two grains on the second square, four grains on the third, and so on. Doubling each time.”

The king, gladdened by such a small price for such a wonderful game, immediately agreed. The king ordered his treasurer to pay the agreed sum of rice. People throughout the kingdom made fun of the inventor saying how stupid he was for asking for so less a reward.

A week later, the inventor went before the king and asked why he had not received his reward. The king, outraged that his treasurer had disobeyed him, immediately summoned him and demanded to know why the inventor had not been paid.

The treasurer explained that giving the inventor the promised amount of rice grains was not possible. When the king asked why, the treasurer explained simple math.

If they followed the agreed condition, on the first box of the chessboard, there would be 1 rice grain. On the second box, there would be 2 rice grains, on the third, there would be 4 grains, 8 on the fourth, and so on.

That is:
1*2*2*2*….. till 64 (there are 64 boxes on a chessboard)
= 1*2^(64)
= 18,446,744,073,709,551,616 grains of rice
= 1,195,328,904,249,040 kg of rice
= 1,195,328,904,249 metric ton
= 1.19 trillion metric ton

For reference, India produces only 122 million metric tons of rice each year.

That was the reason why the inventor was not paid yet. What happened then, whether or not the inventor was ever paid, or whether or not the king was able to keep his promise are things we are not going to talk about. I know you must curious right now, but let’s get back to the point.

The entire point of this story is to teach you the power of compounding. Even if you start investing right now and even if it’s a small sum of money, in the long run, it’s going to give you a huge Return on Investment (R.O.I.).

Being financially literate and conscious is very essential if you ever want to achieve financial freedom. Even if you make over $100,000 (NPR 1,22,25,000) a year and if you are not using it the right way, if you are just spending it on not so important things, or just not using that money properly, you will be working for the rest of your life.

Be aware. Be clever. Be educated. Be financially free.

If you read the article till the end, thank you. I think, regardless of your age, you should educate yourself about money. Because although people say “Money isn’t everything” or “Money can’t buy you happiness”, money is something important and money can buy you the means to be happy (controversial).

PS: If you want to learn more about money, I strongly recommend two books:
1. Rich Dad Poor Dad by Robert Kiyosaki
2. Your Money or Your Life by Vicki Robin

And if you want to learn about making money, you must read The Millionaire Fastlane by M. J. DeMarco.

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