Game of Compounding

In an earlier article we discussed about how to make your money work for you. And this is very much indispensable for an individual to forget it, and the fun in the game is due to a concept called as compounding. Albert Einstein has quoted it once, “Compounding interest is the greatest mathematical discovery of all time”. On every investment you generate a certain amount of money inform of returns, and this return can be regarded as the interest on the principle that you invested. And when this interest is added to the principle and the next interest is calculated on such new principle this process is called as compound interest, and the process keeps on going. Compounding works on two basic premises: re-investment of earnings and time.

And this is the most important feature in any of the investments. Compounding investment earnings can turn your small investments into a whopping sum after a period of time. The best way to take advantage of compounding is to start saving and investing wisely as early as possible. For this let’s play a golf game and try to understand the power of compounding.

The rules of the game are simple; there are 18 holes that you need to put. For the first hole that you put you will receive 10 paisa. And for each successful and subsequent put the stake will be doubled.

Lets see how this looks like on the graph.

And if you closely analyse the fun in the game starts from 12^th hole. But the sad thing is you cannot start directly from the 12^th hole. And if you join the game three holes after, i.e. 4^th hole is your 1^st hole then; you would end up with Rs. 1638.40 only.

‘Time is Money’ and not timing. Most of the people tend to ask this question, what the right time to invest is. I would generally suggest today and right now. The idea is simple: the earlier you start investing, the more likely it is that you would end up making more money. Now once you have decided to make the money work for you, next question that should arise where to take the advantage of this compounding. For this you need to wait a bit for my next article releasing soon.