Compounding - The 8th Wonder Of The World
I’m sure at some point we have studied the chapter - ‘Compound Interest’ in school using the formula(e):
Amount = Principal * [ 1 + (Rate/100)]ⁿ n → time period
Compound Interest = Amount - Principal
But did we really understand the actual power of compounding then? Or did we just apply the formula and solve a particular question for marks 🙄
¹ At the heart of the compound effect is that small steps create momentum. Each action builds upon the previous one, creating a snowball effect that propels us forward. Just as a snowball rolling down a hill gathers mass and speed, our efforts gain momentum as we consistently take small steps toward our desired outcomes ¹.
Imagine a chessboard - a simple 64-square grid and a humble request: place one grain of rice on the first square two on the second, four on the third, and so forth, doubling the amount on each subsequent square as ou go on. The progression seems pretty slow at first, but as you move across the board you will find that the numbers increase in an exponential manner. By the time you reach the 64th square, you wiould find yourself staring at an astronomical pile of rice, surpassing the world’s total rice production
Let's break it down:
· 1st Square (2⁰ = 1 grain)
· 2nd Square (2¹ = 2 grains)
· 3rd Square (2² = 4 grains)
· 4th Square (2³ = 8 grains)
Up to this point, The total is 15 grains.
The pattern continues, and you keep doubling the amount on each subsequent square. By the time you reach the 64th square:
· 64th square (2⁶³ grains): This is where the exponential nature becomes mind-boggling. The total grains of rice on the 64th square alone would be 2⁶³ grains!!!
This amount is far beyond the world's total rice production. The sheer magnitude of exponential growth is a very interesting concept and is often used to show the power of compounding and the rapid increase that can result from a small, consistent doubling over time.
In the world of finance, the concept of compounding is similar to a hidden force, silently working its magic to turn small efforts into substantial gains over time. Even though talking about compounding might sound a bit boring, like something only people into stocks and interest rates care about, its impact goes way beyond just finance
Lets look at a simple example:
Committing to a daily exercise routine can be compared to planting the initial grain on a compounding chessboard. In the early stages a single workout may not seem transformative just like a grain of rice on the board's first square. Yet it's the consistent doubling effect that cerates these extraordinary results over time. Initially modest efforts like short jogs or smal yoga sessions, establish a foundation. As days turn into weeks the physical capability of the body will multiply exponentially. The compounding effect extends beyond the physical state, linking to improved mood, increased energy, and enhanced cognitive function, creating a positive feedback loop. Over time what began as a modest commitment transforms into a lifestyle compounding into a robust foundation of health and wellness. The dividends include reduced chronic disease risk, improved longevity, and an overall enhanced quality of life according to the doctors.
The compounding effect of daily exercise is the prerfec6t example which showcases the transformative power of small, consistent efforts on physical health and mental well-being just like the grains of rice doubling on a chessboard turning into a wealth of health that pays dividends for years to come.
In relationships, the power of compounding manifests through small acts of kindness gradually building a reservoir of trust and love. A consistent effort to improve oneself even if modest, compounds into significant personal growth. The key is persistence – to allow the effects to accumulate.
Think of saving money like planting a seed for your finances. Even if you start small, the magic happens as your savings consistently grow over time—kind of like financial glow-up. Whether you're making modest contributions to a savings account or investing, these are the building blocks for a solid money foundation. As the months roll into years, compounding kicks in multiplying your savings and earning interest on both your initial deposit and the interest you've already earned. Beyond just making more money, saving regularly gives you a comforting feeling of financial security and peace of mind. It's like a positive loop that keeps you motivated to stick to your savings routine. This journey of financial growth helps you reach your money goals and sets you up for long-term financial freedom
So, as we navigate the chessboard of life, let’s be mindful of the grains we sow. Whether in finances or personal development, the power of compounding teaches us to appreciate the small, consistent efforts that, over time, become the building blocks of a fulfilling and prosperous life.
(I suggest reading more articles based on the financial aspect as they’ll be able to give you a better insight into the technical terms related to finance)
Thank you 😄
Bibliography:
¹………¹ - https://www.holisticwellnessstrategies.com/post/the-power-of-the-compound-effect-small-steps-big-results