The Power of Compound Interest
What is the most powerful force in the universe? Some might say gravity. Some might think it is love. But you are all wrong. The most powerful force in the universe is….compound interest! What? If you don’t know what compound interest is, don’t worry. I’ll explain.
Have you ever heard the story of the king that wanted to repay a loyal subject that saved the life of the king? To say thank you, the king instructed the subject to ask for what his heart truly desired, and if reasonable, the king would fulfill his wishes.
The Loyal Subject’s Request
The loyal subject pulled out a chess board.
“Your majesty, your loyal subject has but one request. I ask only that the King instruct his servants to place a single grain of rice on the first square. Then, the next day, they should double that amount, and place on on the next square. So on and so forth, with each day doubling the amount of rice placed on the next square until every square on the board was covered.”
King: “That’s it?”
Loyal Subject: “Yes, your Majesty. That is your loyal subject’s request.”
King: “You want rice?”
Loyal Subject: “Yes, your majesty. Starting with just one grain.”
King: “That’s it? Just rice.”
Loyal Subject: “Yes, your Majesty. Just rice.”
The king was surprised. He offered to grant his subject’s wishes, but all the subject seemed to be asking for was a bit of rice. The king thought his loyal subject must be either crazy or foolish. What the king did not understand was the strongest force in the universe, COMPOUND INTEREST.
The king, as bewildered as he was, accepted the request of the subject. After all, he had saved his life, and all he wanted was some rice. The king instructed his servants to bring the grain of rice for the first square. The next day, the king had them place two grains of rice on the second square, then four grains on the third day.
The loyal subject of the king sent a message to the king, thanking him again for agreeing to the request. The king laughed. His silly subject could have had anything, and the king got away with paying him with a bit of rice.
The King checks in
About a month later, the king checked in with his servants to see how the rice situation as progressing.
Servant: “It is going very well, your majesty. We just passed the million grain mark.”
King: “WHAT?!?,” shouted the king. “What do you mean million grains? You must mean a thousand grains.”
Servant: “Your majesty, on the 31st day, we placed just over 1 million grains of rice, not 1 thousand. Everyday the amount doubles. Tomorrow it will be just over 2 millions grains, and then 4 million the day after.”
The king was again shocked, but now for a completely different reason.
King: “How much rice are we going to giving my loyal subject in the end?”
Servant: “Your majesty, I am but a simple servant. I will have to ask the king’s wise men to make the calculations.”
A short time later, the servant came back with the number.
Servant: “Your majesty, the wise men say that the number will be 9.2 billion billions.”
K: “Wow! 9.2 billion is SO much rice.”
Servant: “Your majesty, please forgive your servant. It is not 9.2 billion. It is 9.2 billion billions.”
The king fainted. He was knocked out by the power of compound interest.
What the King didn’t know
What the loyal subject knew, and the king did not know, was just how powerful compound interest is. The growth each day is affected by the previous days. Each of these days then affects the days that follow it. It is not just growth, but it’s actually the growth of growth.
The power of compound interest can work both for or against you. In our story, the pile of rice was growing at a daily rate of 100%. If you have high interest credit card debt (for example 10% or higher), your debt will be growing fast as well. Rather than growing a huge pile or rice, you are digging a deep hole of debt. You are paying interest on the interest! That’s BAD!
If you have investments, your investments will be growing, with growth of the growth, more like the loyal servant’s pile of rice. That’s VERY GOOD.
Compound interest is a super powerful force, so you want it working FOR you, not AGINST you. In the next video we will discuss how to get on the right side of compound interest. If you are in debt high interest, you want to get out of debt as quickly as possible. There are a few methods do doing that, and we will show you how to figure out which is best for your particular situation. Once you are out of debt, you can get your money working for YOU!
