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HomeInvestmentKnow How to Use the Power of Compounding

Know How to Use the Power of Compounding

The quote, “Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it,” is often attributed to Albert Einstein. He was a pretty smart guy, so it’s fair to assume that there’s some wisdom in that assertion. Regardless of the specific context of that quote, Einstein astutely cited the consequential power of compound interest in finance, investing, and economics.

To understand this in an easier way, let’s take an example: given an option of having 1 Rupee coin today that doubled everyday for a month or taking Rs 1 crore instantly. What would you choose?

The instant answer would be to take Rs 1 crore instantly, who has seen tomorrow, isn’t it? However, this is where our financial life gets derailed. Because choosing to have a Re.1 coin today that doubled everyday for a month would have been a better option. Why? Because it would have fetched you a whopping Rs 53.68 crore after 30 days! That’s the power of compounding.

Explanation

  1. Initial Amount: You start with 1 Rupee.
  2. Doubling Each Day: Each day, the amount doubles. This means that the amount on any given day n can be represented by 2^(n-1) Rupees.

Calculation

For a month, we’ll assume 30 days.

– On Day 1:  2^ (1-1) = 2^0 = 1 Rupee

– On Day 2: 2^ (2-1) = 2^1 = 2 Rupees

– On Day 3: 2^ (3-1) = 2^2 = 4 Rupees

– …

– On Day 30:  2^ (30-1) = 2^29 Rupees

To find the value at the end of the 30th day, we calculate 2^29.

Detailed Calculation:

2^29 Rupees = Rs 536,870,912

Thus, at the end of 30 days, the value of 1 Rupee that doubles every day would be Rs 536,870,912

Breakdown:

Day 1: 1

Day 2: 2

Day 3: 4

Day 4: 8

Day 5: 16

Day 6: 32

Day 7: 64

Day 8: 128

Day 9: 256

Day 10: 512

Day 11: 1,024

Day 12: 2,048

Day 13: 4,096

Day 14: 8,192

Day 15: 16,384

Day 16: 32,768

Day 17: 65,536

Day 18: 131,072

Day 19: 262,144

Day 20: 524,288

Day 21: 1,048,576

Day 22: 2,097,152

Day 23: 4,194,304

Day 24: 8,388,608

Day 25: 16,777,216

Day 26: 33,554,432

Day 27: 67,108,864

Day 28: 134,217,728

Day 29: 268,435,456

Day 30: 536,870,912

Conclusion

Starting with 1 Rupee and doubling it every day for 30 days results in a value of 536,870,912 Rupees. This demonstrates the power of exponential growth and how quickly values can increase under such conditions.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.

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