The 8th Wonder ?

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There is a famous quote that floats in internet.


"Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn't, pays it."  -Albert Einstein

 We are not going to investigate whether it is really said by einstein or not, rather we are going to investigate how true the sayings are.
 Compound interest is the interest calculated on both the principal and the accumulated interest from previous periods. In simpler terms, it’s "interest on interest," .
 This is the formula for calculating compound interest

Let’s see a real-world example why it is called as eight wonder. Check this figure.







Sarah has started to invest in compound interest scheme at the age of 20, she invested 1 lakh every year until her 25th age then she stopped. When she turns 34, her current amount is 1583772 (15 lakhs 83 thousand 7 hundred and 72) . Her overall invested amount is 6 lakhs and the interest gained is 983772 (9 lakhs 83 thousand 7 hundred and 73 ). Even though she didn’t invest for 9 years, her money is doubled. Fascinating right? that how compound interest works.  

Mariyam  on the other hand didn’t started early like Sarah, she realized the importance of investing and started investing at the age of 26. She invested 1 lakh every year until she turns 34. Her total invested amount is 9 lakhs and interest is 448656 (4 lakhs 48 thousand 6 hundred and 56 ). Her current value is 1348656 (13 lakhs 48 thousand 6 hundred and 56). When we compared with Sarah, Mariyam has invested 3 lakhs more still her current value is less. This is why many financial advisors ask us to start early.

Priya, started early but in her case she invested  5 lakhs at the age of 20 and she didn’t made any additional contribution. At the age of 34 her current value is 1586085 (15 lakhs 86 thousand and 85). When we compare with Sarah, Priya’s invested amount is 1 lakh less still Priya manages to beat Sarah.  That is the beauty of compound interest.

Just imagine what will be the returns if Priya and Sarah didn’t stopped and consistently stay invested. just imagine if someone has inherited millions and made it compounding for years and years what will be the end result. this is why we call it has 8th wonder. 

Conclusion : To reap the full benefit of compound interest, One must start early and the principle amount should be big. One should be disciplined and consistent. Better late than never if someone starts investing late and they need to catch up, they can increase the investing amount.  In upcoming blogs, we can see the realistic approach to reach 1 crore using compound interest. Leaving a hint for next blog reaching first one crore is simple but not easy.



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