Student Projects/Compounding
Albert Einstein had named the phenomena of compounding to be the 8th wonder of the world. What is the reason did he tell so ?
Mathematically, the effect of compounding can be represented with the help of the following formula.
A= P(1 + r/n )^{nt}
where,
A is the amount after compounding
P is the initial principal amount
r is the rate of interest
n is the no. of times interest applied per time period
t is the no. of time period elapsed
Let us see the power of compounding with the help of this following table.
Suppose you had an amount of 200000 and you selected an investment option which gives you a return of 20% per annum. This is how magically your prinicipal grows if compounded annually.
Sl. No. | time period | amount |
1 | 0 | 200000 |
2 | 1 | 243878 |
3 | 2 | 297382 |
4 | 3 | 362626 |
5 | 4 | 442183 |
6 | 6 | 539194 |
7 | 7 | 657488 |
8 | 8 | 977629 |
9 | 9 | 1192112 |
10 | 10 | 1453650 |
So from the table we could see that how powerful compounding is. There is a very popular folk tale where a king couldn't understand the power of compounding and lost his complete kingdom to a clever saint. The saint had used the power of 2^{n} compounding.
It is also a popular say that if you understand compounding then you can rule or else compounding will rule you.