There is a story about an Emperor of China who was so excited about the game of chess that he offered the inventor of the game one wish. The inventor replied that he wanted one grain of rice on the First Square of the chessboard, two grains on the second square, four on the third and so on through the 64th square. The unwitting emperor agreed to the modest request. But two to the 64th power is 18 million trillion grains of rice - more than enough to cover the entire surface of the earth. The Emperor, realizing that he had been duped, had the inventor of the game beheaded.
So what should we do to take advantage of the power of compounding?
1. Plan our future needs and investments in advance to take advantage of compounding.
2. Let the power of compounding work by never withdrawing from the investment.
3. Start as early as possible to give “compound interest “ enough time to work.
See an example to understand the need for starting early and make the POWER OF COMPOUNDING work for you.
A and B want to retire at the age of 60 years. To take care of his post-retirement requirements, A invests a total amount of Rs. 35 lakhs towards his retirement corpus. On the other hand, B invests a total of Rs 50 lakh towards his retirement. Despite investing less, A accumulates Rs 298 lakh, compared to B's accumulation of Rs 216 lakh.
This was possible because,
A had TIME in his favour. He began investing a sum of Rs 1 lakh p.a. earlier, at the age of 25 years, up to the age of 60. B, to compensate for lost time, saved twice the amount invested by A i.e. Rs. 2 lakhs every year from the age of 35, till the age of 59 years. But he couldn’t match up with A because he did not use the power of compounding for long.