09/01/2022
THE MIRACLE OF “COMPOUND INTEREST EFFECT” FROM A 64 SQUARE CHESSBOARD STORY
I. "Compound interest effect" is known as the 8th wonder of the world
The famous physicist Albert Einstein called this effect the 8th wonder of the world. Because those who understand it will use it and "earn". And those who don't understand will pay for it.
Why did Einstein call compound interest the 8th wonder of the world? To know that, read this entire post.
II. A little story to understand better:
Once, the king was playing chess. The king loved this game and invited its creator to his palace. The king said, "Ask whatever you want. I will reward you." The man replied, "King, I don't want anything big. I just need a grain of rice on the first square of the board and double the amount on all subsequent squares. Please grant me those grains."
When the king heard this, he was extremely angry and replied: "How incompetent! Are you looking down on me? If you wish, I can give you gold, silver, diamonds or whatever valuable". But the man still refused and replied: "I just want the amount of rice that I asked for".
Then the king thought that this man did not want to become rich. He called the servant of the Palace and asked for the amount of grain according to his request. After a number of days, the palace servant came to the king and said, "Your Majesty, we all think he is a weakling. But he is very intelligent. No one in this world can give as much grain as he asks."
How is it possible? If you think so, read the explanation below.
#1. The magic of compound interest
The chessboard has a total of 64 squares. As the man asked: If you put 1 grain of rice in the first square and duplicate it in the next square. The total number of paddy will be calculated like this: 1 + 2 + 4 + 8 + 16 + 32... when it has 64 squares. Total amount of rice will be 18,446,744,073,709,551,615. We don't understand how to count it. But if you estimate it, it will be 461 billion calculation units. Today, the value of that grain is more than 300 trillion dollars, equivalent to the total wealth of the whole world.
Now we can understand that man didn't just take small grains of rice. He is very intelligent, he knows the power of the compound effects, so what he is asking for is the entire wealth of the world.
#2. Movement of the compound interest effect
The compound interest effect is also known as the domino effect or the snowball effect. It's like a process: We invest in something and get a return on it. In the compound interest effect, you get the profit from the profit.
Money grows rapidly over time. That means your money will continue to multiply over time. Let's look at the example below:
I will give you two offers: Either I will give you 5 USD a day, or 1 USD but will keep doubling for 30 days. Here are two options for you. Which one would you choose? Supposedly you choose the first way, your friend chooses the second.
On the first day you have 5 USD and your friend only has 1 USD on the first day and 2 USD on the second and 4 USD on the third. Like this, the growth rate is very slow.
When we look at the growth, we will feel that this is not a big growth. But the real magic happens on the 18th day. That 1 USD will become 131072 USD on the 18th day, that is the cut-off point, after the cut-off point money will increase faster. That $131072 will become $536870912.00 in 30 days.
That is the power of compound interest. The compound interest effect will take some time and slowly it will give you big results.
If we examine the graph of compound interest, you can see, It will give higher growth over the past years of investment. As I said after the point of arrival, the growth will be very high. A person can generate 70% of his wealth after age 50.
But most people usually don't have the patience. If they try a few times and get no results, they give up.
Many people will start exercising but at most they do it within a week. Because they don't get tangible results in a week, they think it's a waste of time and give up as a result. A lot of us want to improve our lives and so start reading some books. But after starting to read without getting anything, we all drop it before the limit is reached.
You can apply compounding in every aspect of your life. We should all understand one thing, there is no overnight success. If we see someone become famous, all will think that they became famous overnight.
But actually, they spent many years working hard to become famous. None of us can see it. Do you know the famous football player Lionel Messi, it took him 17 years to become successful. 17 years of hard work is his overnight success.
#3. How to use compound interest?
If you want to reap the benefits of compound interest, start small and do it consistently. After a few years, you will get the greatest payoff for all your efforts. Do everything on purpose, decide for yourself and don't live like a machine.
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