THE MAGIC OF COMPOUND INTEREST

Albert Einstein supposedly said, “Compound interest is the greatest force in the universe.”

What is compound interest? It is the money you earn by re-investing all the interest you earn. Compound interest is very important in to know how the rich get richer.

Here’s an example of compound interest. If someone were to offer you the choice between 1 cr cash now, or a Rupee on day 1, with that figure, doubled and compounded each day for 31 days, which should you take?

The correct answer is, you should take the latter one because it will amount to Rs.1,073,741,824. Here is how math works out:

Day 1: 1

Day 2: 1 x 2 = 2

Day 3: 2 x 2 = 4

Day 4: 4 x 2 = 8

Day 11: 1000.24

Day 21: 104,857

Day 31: 1,073,741,824

Calculation; Starting Date amount ×2^{No of timetodouble-1}

Compounding interest is, after all, how the rich get richer.

‘Rule Of 72’

The rule of 72 is a shortcut to estimate the number of years required to double your money at a given annual rate of return. The rule states that you divide the rate, expressed as a percentage, into 72:

Years required to double investment = 72 ÷ (compound annual interest rate×100)

72÷(0.08×100), giving a result of 9 years