Great to look at such figures, but why people forget time value of money. On Wed, Aug 18, 2010 at 11:17 AM, alok agarwal <[email protected]>wrote:
> > > > If compound interest is so simple that it is taught in high school, how > come it took Albert Einstein, arguably the greatest scientist in the world, > to call it the 8th wonder of the world? > > Was it to remind us that we forgot about a magic theory? Really, > understanding compound interest is very, very difficult. The human mind does > not comprehend such growth so easily. We in our physical selves have a > simpler type of growth. So we do not comprehend compounding of growth. A few > old, really old stories might just help. > > Let us start with the famous story of the Persian emperor who was so > enchanted with a new 'chess' game that he wanted to fulfill any wish the > inventor of the game had. This inventor, a mathematician, decided to ask for > one seed of grain on the first square of the chessboard doubling the amounts > on each of the following squares. > > The emperor, at first happy about such modesty, was soon to discover that > the total yield of his entire empire would not be sufficient to fulfill the > 'modest' wish. > > The amount needed on the 64th square of the chessboard equals 440 times the > yield of grain of the entire planet. Just try converting into money in any > currency and you will realise the importance of compounding. > > A similar analogy is that one penny invested at the birth of Jesus Christ [ > Images <http://search.rediff.com/imgsrch/default.php?MT=jesus+christ> ] at > 4% interest would have bought one ball of gold equal to the weight of the > earth in the year 1750. In 1990, however, it would buy 8,190 such balls of > gold. > > At 5 per cent, interest it would have bought one ball of gold by the year > 1466. By 1990, it would buy 2,200 billion balls of gold equal to the weight > of the earth! > > The example shows the enormous difference 1% makes. It also proves that the > continual payment of interest and compound interest is arithmetically, as > well as practically, impossible. > > Just see what a difference it would have made if your great grandfather had > invested in a bank fixed deposit only Rs 100 say 150 years back. What it > would have grown to? > > Here is a dream sheet. See for yourself. Imagine Rs 100 is invested and it > grows at 10 per cent every year. > > Column 2 is what it will grow to if it was held for the number of years in > column 1. So if your great grandfather invested Rs 100, 150 years ago, you > would have inherited Rs 16 crore (Rs 160 million). > > *No. of years it is invested for:* > > *What it would grow to > in Rupees:* > > 1 > > 110 > > 5 > > 161 > > 10 > > 259 > > 15 > > 418 > > 25 > > 1,083 > > 50 > > 11,739 > > 100 > > 1,378,061 > > 150 > > 161,771,784 > > 200 > > 18,990,527,646 > > 300 > > 261,701,099,618,845 > > 400 > > 3,606,401,402,752,540,000 > > 500 > > 49,698,419,673,124,400,000,000 > > So what is the learning from this sheet? Even a 1 per cent difference can > make a mountain of a difference, but the greatest difference is made by the > number of years the money remains untouched. That is the key. > > For those more mathematically inclined, I state below the formula: > > Vn = Vo * (1+r)^n > > 'n' in the compounding formula is the number of times the amount is > compounded. > > But for practical purposes if you take that as the time for which you stay > invested in an instrument, you would not be too wrong either. > > What it means is that: > > *The amount of money that you require (Vn) is equal to the amount invested > today (Vo) multiplied by [1+ interest rate (r)] raised to the number of > times the amount is compounded (n).* > > In this formula you as a client can control how much money you want at the > end of the waiting period (Vn), how long the money can be invested (n), and > how much money you can invest today Vo. > > Instead of worrying about 'r', just start investing. That is the key. > > *Takeaways:* > > - Start investing early. > - Do not touch the amount for a long time. > - Do not keep jumping from one investment instrument to another. > - Let the power of compounding work for you. It would have worked for > your grand-dad, dad and you. If they knew it, great. If they did not, you > can start the line. At least your grandchild will praise you for it. > - To see what it would have become over 500 years is fantasy. What it > could have become over 150 is Ratan Tata [ > Images<http://search.rediff.com/imgsrch/default.php?MT=ratan+tata>]. > - When you read about 'the rich get richer, and the poor get poorer,' > it is not about socialism. It is about compounding. > > *The author is a chartered accountant and a financial domain trainer. He > can be reached at [email protected]* > http://in.rediff.com/money/2006/jun/29perfin.htm > > -- > You received this message because you are subscribed to the Google Groups > ""GLOBAL SPECULATORS"" group. > To post to this group, send email to [email protected]. > To unsubscribe from this group, send email to > [email protected]<globalspeculators%[email protected]> > . > For more options, visit this group at > http://groups.google.com/group/globalspeculators?hl=en. > -- *Thanks Manoj Damani +91 9903009493* -- You received this message because you are subscribed to the Google Groups ""GLOBAL SPECULATORS"" group. To post to this group, send email to [email protected]. To unsubscribe from this group, send email to [email protected]. For more options, visit this group at http://groups.google.com/group/globalspeculators?hl=en.
