This is great finance question you have asked from me "Why Einstein told compounding eighth wonder of of the world?
First of all, you know that Einstein was great scientist. If he told “eighth wonder of the world,” saying, “he who understands it, earns it; he who doesn’t, pays for it.” It means, it has power
Following are the main reasons to Say Compounding as Eighth Wonder of of the World
1. Compounding Walk Slow But It Walk Non-Stop without Tired
Compounding has great quality, it is not in high speed. It has slow speed. Suppose, if you are getting only 10% return on your investment, first two years, you will not see any effect but if
you give time, you do not withdraw your principal and if you do not consume your earning and re-invest, it will walk long and long without stop and with simple formula of 72
Within 7.2 years, your principal will be
DOUBLE
within 14.4 years
your principal will be in 4 Times of its initial value
In 21.8 years, your principal will be 8 times from its initial value
In 28 years, your principal will be 16 times from its initial value
In 35.2 years, your principal will be 32 times from its initial value
Second, compound interest has the power to build big wealth. Compound interest means interest on interest if you do not take saved or invested money for personal use in short period of time and you leave it for long growth.
Example
See practical, how small amount becomes big with compound interest
Amount = Principal ( 1+ rate of interest/100)^ time
at 20th year total amount = 672
You can see if I save only Rs. 100 with 10% interest, it will 4 times with the help of compound interest. It is the power of interest because compound interest has power to strength your money by joining it and interest on it.
My duty is not to use this 100 but if I can do it, increase the amount of principal by saving more if I am interested to
2. Compounding is Best Friend Who Saves and Invest and Enemy Who Take the Loan
Compounding is wonderful in the world. It becomes best friend who saves and invest the money
Suppose, I am person who only focus to save and invest, save and invest. For this, I have sacrifice my desire to buy things what I love and what I can be used for showing my status and my entertainment stuff. Compounding came to me
1. He says, you are my best friend. I say, I do not know you. But he says he knows you very well. You are the person who saves and invest all time without any worry.
So, we talk with each other
Me : If you are my best friend. What can do for me
Compounding : I will carry your investment at the level you can not imagine. If you will give me Rs. 100 for 35 years with rate of interest of 10% pa, I will make it Rs. 3200
If you will give me 1000 for 35 years with rate of interest of 10% pa, I will make it Rs. 32000
If you will give me 10000 for 35 years with rate of interest of 10% pa, I will make it Rs. 320000
If you will give me 100000 for 35 years with rate of interest of 10% pa, I will make it Rs. 32,00,000
If you will give me 10,00,000 for 35 years with rate of interest of 10% pa, I will make it Rs. 320,00,000 = Rs. 3.2 Crore
It means, you have sacrifice of your Rs. 10,00,000 desire and if I deduct it from after 3.2 crore,
still, you will have Rs. 3.1 Crore which I just added through your interest.
Can I not deserve as your best friend.
Me : Yes, you deserve as my best friend
Me: Now, how will you become my enemy if I will take loan, even a single time
Compounding : Great question, you are becoming more smart
Dear, if you will take the loan, you have to pay compound interest. I will create barrier in your wealth growth. I will do all things to stop your way of growth and I will happy to make you financial slave.
If you will take Rs. 1000 Loan for 35 years with rate of interest of 10% pa, I will take Rs. 32000
If you will take loan of Rs. 10000 for 35 years with rate of interest of 10% pa, I will take Rs. 3,20,000
If you will take loan of Rs.100,000 for 35 years with rate of interest of 10% pa, I will take Rs. 32,00,000 from you
If you will take loan of Rs. 10,00,000 for 35 years with rate of interest of 10% pa, I will take Rs. 320,00,000 = Rs. 3.2 Crore from you.
ME : But, If I do not have money of Rs 3.2 crore at the end of 35 years because I had made the house with this Rs. 10 lakh, how will take this Rs. 3.2 Crore from me.
Compounding : You are becoming so intelligent day by day.
I become so bad person when you will take loan from anywhere. I am very dangerous enemy for you.
Yes, You can not free from my revenge by saying, you do not have the money.
You have to give me Rs. 3.2 crore through MATH rule
p (1+r/100)^t
No one can challenge it
whether it is supreme court of India or USA Court or Russia Court or UNO
I will sell your house even after 35 years on the road through auction because
I do not threaten, I do the action.
I do not abuse, I do only action.
You will depression no problem
You have heart fail no problem
You will die, no problem
Even, after your death who will have the right of your property will pay the liability of Rs. 3.2 Crore because I am your enemy and I will not give peace after your death.
I can show this world,
I am 8th Wonder of the World. If I make the friendship with any person, I carry on my friendship every moment. I will make the richest person to you.
But if I will become the enemy, I will make you beggar. Go on the road and beg and repay my compound interest. You deserve to slave and die like slave.
3. Compounding is the best Teacher
It is 8th wonder because it is best teacher.
Like a best teacher, it tries to best to say
I am compounding,
If you will earn the first money
Never consume it all
Save its some proportion
Invest it for 35+ years minimum
Never withdraw it
If you are earning the money, never consume it all
Save its some proportion and
Invest it for 35+ years minimum
4. Compounding Can Compel to Rethink before Spending Each Rs. 1
If you understand compounding whole, it will will compel to rethink before spending each Rs. 1
a) Can you not postpone these expenses when by investing your Rs. 1 has power to generate Rs. 28 in the end of 35 years with compound rate of interest 10%
b) Is simple living not better for achieving big dream of financial freedom in this life.
c) If you see the magic of money your life, can not you control your expenses like
making food at home, travel on cycle, use less petrol, use less electricity, use less paint to your home, buy less clothes, grow your own veg., grow your own fruits and save money and invest it and see its compounding effect
5. With Compounding, You can win the Fight from Biggest Intelligent People of the World
One of great wonder, if you are not so intelligent but you have the attitude to respect compounding, you can defeat the biggest intelligent people of world in the competition of wealth building.
Today, you will see lots of employee in different big companies. You see intelligent employees in all big companies.
They go to office. They get the salary. Even, you are not so intelligent to reach same position but still your wealth more than them if you saved and invested your small earning long time and control your expenses. Look simple but how can compounding defeat the high salaried intelligent person
Suppose
ABC Company has employee CEO = Rs. 52 Crore in One year.
It means CEO is earning per month through salary
It means, every month, he is earning Rs. 4.3 Crore.
If he does not save or invest and do not get the benefit of world's biggest force, he will not any net worth.
Now, we compare them with two person
One is rakesh jhunjhunwala ( Now, he expired ) whose Net worth is Rs. 41000 Crore
Second is warren buffett whose net worth is ₹ 7.75 Lakh Crore
Both above two person not so intelligent but have the high attitude to grow wealth through Compounding
Simple three factors
Invested capital
Re-invested its earning with specific rate of return
Never Disturb compounding by not withdraw same money.
Attitude will always winner from intelligence
Tiger is neither intelligent like fox
Tiger is neither tall like elephant
but still he is king due to his attitude of bravery and taking risk.
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