Here's a story about how to make your money grow…no short cuts, just the slow and steady way.
This month, let us take a look at one of the most timeless stories ever — Aesop's Fable about the tortoise and hare. Generations of children have enjoyed this story and learnt a very important life lesson from this. Do you remember the moral of the story? “Slow and steady wins the race”.
Let us try a thought experiment to see if this story is relevant when it comes to the world of money and if its moral can be applied to investing (which is actually growing money over a long period of term).
In this experiment, instead of running a race, the hare and the tortoise put aside money in a black box that pays 15 per cent interest at the end of the year. The hare starts putting aside 1,000 Rupees at the beginning of year one. At the end of the year, how much does he take out of the black box? You guessed it right! He takes out 1,150 Rupees. The 1000 Rupees that he put in initially along with an interest of 1,150 Rupees. Now at the beginning of year two, he adds another 1,000 Rupees to the 1,150 and puts it back in to the black box. He keeps repeating this for 10 years. At the end of 10 years, he stops adding the 1,000 Rupees as he becomes lazy and over confident, as in the fable. So he takes out the money from the black box at the end of every year and puts it all back in to it at the beginning of the next year, without adding anything to it.
The tortoise, being slow and steady, actually starts playing this only at the beginning of the year 11. For the first 10 years, he does not set aside any money for the black box. But starting from year 11, he sets aside 2,000 Rupees every year for the black box. Every year, he adds this money to the money coming out of the black box and puts all of them together right back into the box. Both the black boxes generate 15 per cent interest. Not only that, he keeps doing this for the next 20 years.
Now, at the end of year 30, take a quick guess as to who would have the most money? Write down your answer, find out with the help of a calculator or a spreadsheet if your answer is correct. Does the answer surprise you?
Money Trivia : In our story, both the hare and the tortoise are compounding their money over a period of 30 years. Legendary investor Warren Buffet has been compounding money at a very healthy rate for over 55 years now. Look where that has taken him. He is consistently ranked among the top three wealthiest people in the whole world!
Young World Money-Wizards Quiz #8 Do the calculations to find out how much money the hare and tortoise are left with at the end of year 10, year 20 and year 30. Who is the winner in the money race? What is the moral of the story? Is the moral different from the Aesop's Fable? If yes, why?
If you know the answers, email your answers to firstname.lastname@example.org. The first four correct answers and the most articulate answer within seven days will each be awarded flipkart evouchers worth Rs. 250/- . The results and the answers will be published at www.money-wizards.com
About Money-Wizards: Money-Wizards is a company in financial literacy and money education. They conduct workshops and after school classes on money education for school children. If you want Money-Wizards programmes in your school or neighbourhood, write to Info@Money-Wizards.com.