Magic of Compounding

Magic of Compounding:

In 1626, Peter Minuit of Netherlands bought the island of Manhattan from the Lenape people for a basket of clothes, beads and other stuff that would have been worth just $24 then.

Now, you might think that the native Americans were robbed.

Actually, if they were able to invest that $24 in a 8% bond, that account would be worth $303 trillion in 2019 — enough to buy entire America and much more!

Market capitalization of all American listed companies is approximately $30 trillion. Assume equal market cap of unlisted businesses (which is far stretched assumption), so total m-cap would be $60 trillion. Add another $60 trillion for Gold or other assets. Still you wouldn’t hit $200 trillion mark!

That is the magic of compounding. Your money keeps multiplying the longer you save. If compound interest is the only thing you remember from your high school math, you will survive.

Remember the formula for compounding interest:

Usually we are obsessed about “r/n”, the interest rate. But as the above example shows “nt” i.e. Time factor plays a significant role too.

So start investing early, even if it’s modest sum and at average rate of return. The long runway (Time) will do wonders for you!

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