A long time ago, there was a deadly virus spread in the kingdom. Half of the population dying while suffering from this virus. Several months later, an old doctor found the cure for this virus and heal half of the population who were fighting against this virus.
As a reward, the king of the kingdom call the old doctor to come and meet him.
“You have saved the life of thousands! Name your reward!” said the king.
The old doctor then responded,
“Oh emperor, I had a simple wish. Give me one grain of rice for the first square of the chessboard, doubling the quantity for every next chessboard square.”
“Is it the only thing that you want? Don’t you want other more expensive things?”
The old doctor insisted that that is all that he wanted. The king then agreed with the small reward asked by the old doctor — or so he thought. The next day, the pointed out a man to do the request.
A week later, his treasurer came back and informed him that the request would add up to an astronomical sum, it is a lot greater than all the rice that could conceivably be produced in many many centuries!
The number of grains placed each day is called “geometric sequence”. The request of doubling every amount from the before square shown how fast a sequence like this can grow. It may look simple and small when it starts but after a number of time, it will grow exponentially.
The same logic can be applied to our own personal finance. In investment, we do not need to start with a bunch of money! Start with a small amount but consistently set aside that amount to your investment instrument.
“You do not have to be great to start, You have to start to be great” — Zig Ziglar
The compound interest magic works in consistency. The money that earned interest or dividend + the amount you add every month will make your balance grow faster and bigger. As interest is added to the account, the interest will be earned on the original balance + previously earned interest.
Start investing in young age so that the magic of compound interest will make you rich. It might seems like too simple but think of that rice story! People under 35 has the biggest advantages to plan for eventual financial freedom.
99% of Warren Buffet’s wealth was earned after his 50s and this shown how the magic of compound interest work.
Einstein once said that the most powerful force in the universe was the principle of compounding.
What should we do to enable the power of compounding ?
1.Keep on track on your expenses
In order to be able to put aside the amount of money that we will invest, we need to watch out our expenses pattern so that we can diminish the unnecessary expenses and cutting them down. This will give us extra value to do investment.
2.Start as early as possible
While we are in our 20s, we do not have a lot of dependents sometimes, it is just yourself! Due to this reason, we are able to put our money in more risky (measured) instrument which will give more return and this will even grow the account much quicker.
3.Consistency
Consistency is still the key. The market is a bit noisy at some point of time. Being consistency is not easy but that is what we should do.
4.Patience
As Warren Buffet’s wealth grown exponentially when he was 50 (he starts 14) Patience is really a matter. Just imagine if he stops at 30, he would not have been one of the richest man in this world!
Bottom-Line
To be benefited from the magic of compound interest, we do not need to be a financial expert. Just keep learning and reading of how the famous investor did in this world and applying those method to your own investment journey. Consistency is the key!
