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The Wonders of Compounding

Some random dude with messy hair once said this;

Help!!! Minimum Sum is too high - Albert Einstein on Compounding

I don’t personally know him, but he seems to make sense. He create a formula. I mean, anyone can do that. Right?

Many people knows the concept of compounding. However, many is unaware of exactly how powerful compounding is.

Here is a little story about compounding.

The King and the Chessboard

Legend has it that a King is very happy with one of his servant. As all happy King does, he rewards the servant.

He told his servant in his most happy, kingly voice, “You, I am very pleased with you, I will reward you. What reward do you want? Name it. I am King, I can give you anything you want.”

The servant is wise, and with his humble voice he replies, “Dear King, I do not ask for much. I request for rice. However, my request is very specific. Do I have your permission to propose?”

The King replied, “Go ahead. I am the King, I have the best of riches in this land. I have plenty of rice, I grant you permission to speak.”

The servant said, “Dear King, there are 64 spaces on a chessboard, therefore, I want my reward to be spread out across 64 days. The first day, I would like 1 grain of rice. For everyday, I would like to double the amount of rice I get, until 64 days is up.

Therefore, for the first day, I want 1 grain of rice. The second day, 2 grains of rice. The third day, 4 grains of rice. 8 grains of rice the day after. 16 grains the day after. And so on until 64 days.”

The King, thinking it is just rice, readily agreed.

It’s just grains. Where are the grains?

For the first 5 days, it is still ok. Giving out a total of 31 grains. How hard can it be?

After 10 days, things are starting to look a bit worrying for the King. 1023 grains has been given out.

And it all started with one grain. By the 1/3 mark, the King knew that his tenure as King is numbered. He has effectively given away his Kingdom to his servant.

Why? By 22 days, the King has given out a total of 4,194,203 grains of rice.

With the power of excel, let’s see how much rice will the servant get everyday?

In total, after 64 days, the King would have to give out 18,446,744,073,709,600,000 grains of rice. It starts with 1 grain of rice.

I don’t even know how to read that out!!!

Compounding

That is some serious compounding. Therefore, we really have to reiterate what Albert Einstein says, “Compound interest is the 8th Wonder of the World. He who understand it earns it, he who doesn’t, pays it.”

Well, imagine you are the servant and it is in dollars instead of grains.

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