You can grow rich through the power of compounding if you fully comprehend how it works. It is extremely simple but very powerful.
Albert Einstein, arguably one of the smartest men to have lived, is reputed to have said, “The most powerful force in the universe is compound interest.” He called it the “Eighth Wonder of the World”. However, it is baffling that so few of us fully comprehend the dynamics of compounding, its application and the paramount power it generates.
We were taught how to solve compounding problems at school—and back then we were completely oblivious to its awesome power… Our teachers would have been millionaires had they understood its power. Unfortunately, like us, they only knew how to solve textual problems without being fully aware of the magnitude of it; when applied correctly- it has the capacity to change our financial future.
Understanding the Power of Compounding
For the ease of understanding let us take an example: Imagine you could invest one dollar at the beginning of the month—now imagine that one dollar in saving double with each passing day for an entire month.
On day two your investment will double to $2, on day three it will be $4 and on day four it will amount to $8, so on and so forth. I have plotted weekly graphs below to show you how your investment will increase. Allow these graphs to impinge on your mind, heart and soul because they hold the fundamental principle for you to become rich.
If you observe the graph above, you will notice that on day seven your initial investment will be worth $128. Nothing too inspiring, right?
After the end of two weeks (fourteen days – see graph below) your investment would have increased to $16,384. I’m sure it is still not exhilarating.
On completion of three weeks (21 days), your investment would have grown to over two million as depicted in the graph below. Now things are starting to get interesting.
Last 10 Days
At the end of four weeks (28 days), your one dollar investment will now be worth over two hundred and sixty eight million dollars. Wow now, this is getting interesting.
The fun is not over. In the next three days: 29th, 30th and 31st, your net worth will be over two billion dollars ($2,147,483,648, to be exact). In the last three days your investment multiplies nearly 10 fold. See how your money increases in a matter of four days (28th-31st), on the chart below.
Graph Depicting the Entire Month’s Growth
To help put your investment into perspective– observe the graph below that depicts how your investment will grow during the month. You will notice that during the initial period (up to the 22nd day, to be precise) your growth is not even visible on the chart. This is called the ‘Tunneling Effect’ .
These graphs have been included to highlight the simple truth that “With compounding your money multiplies exponentially if you give it time.”
If you were to wait just one more day—that is the first day of the following month, then your net worth will double to $4.3 billion. Moving forward with the passage of each successive day, your net worth will continue to expand at a mind-boggling pace.
Monthly graph shows the the tremendous power of compounding. Of course your money does not double every day. But by smart investing you can double your money every 5 to 7 years. By applying leverage sensibly you can double your investment in one to two years. This is what educated investors do to grow their wealth.