This means you get money on money that you earned on the money you invested. To simplify interest on interest.
Let me tell you the story of the Legend of Paal Payasam(king) and Krishna.
Long ago there lived a king who was fond of chess and used to challenge everyone if a person wins against him he would reward them whatever they ask for.
A modest monk (Lord Krishna disguised) accepted the challenge. The king thought what could this modest monk possibly ask for even if he wins and accepted the challenge.
If you guessed the monk won, you’re right. But wait for the prize the monk asked for.
He asked for grains of rice but with a condition, on every square of chessboard the rice grains should double. The king laughed and agreed.
First square one grain, two on the next, four on the next, 16 on the 4th square, and so on. By the 10th square, the number was 512 grains and by 20th square, it was 5,24,288 grains. By the 32nd square, it aggregated to 214,74,83,648 that’s 214cr.
Soon it turned out to be in lakhs of crores and the king understood the entire kingdom’s rice would not be enough to pay him.
You just observed what compounding can do. Two things you have to do are do not disturb the process unnecessarily – let your interest earn more interest and wait patiently.
FV = PV (1 +I) t
The same formula which you might have learned in your school. Consider each square of our story akin to the time you invest your money for. It increases exponentially with each additional unit of increase in time.
Let me share another example of one of the greatest value investors alive Warren Buffet.
On the X-axis is his age & the Y-axis is money he made by using and believing in the power of compounding.
See how his wealth swelled in the recent years, that’s compounding. Please notice number of years it took him, that’s the level of patience you need.
Now that you have understood the power of compounding, let me tell you that it can be leveraged in almost all aspects of your life.
Remember your parents always telling you “start waking up early”. Do you know why they say this? Knowingly or unknowingly they tell you to create a habit of waking early. Habits are a great way to compound your productivity, they let your body function on autopilot mode and save a lot of your energy.
Reading compounds your knowledge base. Regular savings compound your investable amount base. Helping people without asking for anything in return compounds your personal goodwill and your circle.
Physical activity everyday compounds your health benefits, meditating regularly compounds your patience and calmness.
Doing the above stated activities helps you become a better person and compounds your decision-making abilities.
One thing that you should focus on is looking at the long-term picture and keep doing things regularly. The sheer magic of compounding when you do things for really long periods of time does the work for you later in the file.
Take advantage of having time on your side and show up every day on whatever you decide to do. The things you would learn along the way about yourself by doing this would be amazing and the character you develop due to constant effort is very rewarding.
PS: As a tip I would suggest you to write down on a piece of paper habits or activities you want to inculcate with days following. Get back to this paper at the end of every day and tick if you have completed it. The amount of satisfaction it gives and reinforces the activity is amazing.
Further reads:
"The Joys of Compounding" by Gautam Baid
"Atomic Habits" by James Clear
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