Last month we encountered the Tortoise and Hare in the land of money. The story illustrates one of the most powerful concepts in the world of money — compound interest. The tortoise, even though he saves more money every year and for a longer time period, still loses out to the hare. The secret is compound interest. Over short time periods, the compounding effect is not all that prominent, but over a longer time frame, the results are spectacular.
Let us go back to the tortoise and hare story once again. The hare saves Rs 1,000 every year for the first 10 years. After that he saves nothing. However, he compounds his money at the rate of 15 per cent for 30 years. The tortoise starts at the year 11 and keeps saving Rs 2,000 every year for the next 20 years. Like the hare, he too compounds his savings at 15 per cent every year. Let's tally the score at the end of 30 years. Tortoise makes a respectable Rs 2, 35,620 whereas the hare makes Rs 3, 82,146!
Now that you know this, what should you do to make your money tree grow large over a period of time? Yes, you should start investing as early as possible. But starting early is winning only half the game. The second most important thing that you should do is to compound the money consistently, over a long period time. If you could do these two things, you are guaranteed to be a very wealthy person over a period of time.
Incidentally, this is also the route by which countries get rich. Forty years ago, both India and Singapore were third world countries, which is actually an euphemism for poor countries. But within a space of 40 years, Singapore has been a hare to India's turtle wealth wise. The difference is there for all to see. Singapore today is one of the most prosperous nations in the world with a very high standard of living, whereas India still remains a poor country according to several metrics. Hopefully, we can compound our way to prosperity over a period of time.
Money Trivia : Albert Einstein once called compound interest “the eighth wonder” of the world and “the most powerful force” in the world. According to him, he who understands it earns it and he who doesn't understand it pays it. Now that you understand how it works, get ready to make it work for you. May the “force” be with you.
Young World Money-Wizards Quiz #9 : Let's get back to Einstein's quote on compound interest — “he who doesn't understand it pays it”. There is an entire industry whose success depends on the customers not understanding the power of compound interest. This industry is a part of the banking industry and makes its profit by making the force of the compound interest work against the customers. Which industry is this?
If you know the answers, email your answers to youngworld@money-wizards.com. 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 unique and innovative 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
