![]() By the end of the second year, you’ll have £110.25, without you having to add in any extra money. In the following year, you reinvest that £105 for another 5% return. This will mean that you end up with £105 by the end of the twelve months. This is why you’ll sometimes see compounding called ‘compound returns’.īoth mean the same thing, just a tweak in the language.Īnd in a year, you get a 5% return. The words ‘return’ and ‘interest’ are interchangeable. When you save and invest money, all being well, you’ll earn a rate of return on your investment. The pilgrim, being the kind and understanding individual that he was, acknowledged that it was a ridiculously large amount of rice and agreed that the king could pay it off annually, and even pay him in other assets like gold or land. ![]() That is about 210 billion tons of rice, the same as around 10.5 million sphinxes of Egypt – or enough to cover the whole of modern-day India in a one metre thick layer of rice. He calculated that by the 30 th square he would be required to put down 1 billion grains of rice, and by the 64 th and final square he would need to reward the pilgrim with roughly 18,000,000,000,000,000,000 grains (that’s eighteen quintillion for those playing at home). It didn’t take the King long to realise that he may have bitten off a little more than he could chew. The King’s servants began placing grains of rice upon the chess board – one in the first square, two in the second, four in the third, eight in the fourth and so on. However, although stunned, the King stayed true to his promise and acknowledged that the pilgrim’s reward would be met. The pilgrim went on to beat the king in impressive fashion and left the crowd gob-smacked. The king laughed and agreed to these measly terms. When asked his terms, he modestly requested: “Your Highness I would simply like a single grain of rice for the first square and then for each corresponding square to double the last”. What the King didn’t know is that our pilgrim friend was actually a chess grandmaster and had been playing his whole life. One day a pilgrim wandered into his land and was challenged to a game by the King. Whenever a new traveller entered his kingdom, he would challenge them to a game, and if they beat him, he would reward them with any treasure or prize they desired. The King held his own skills in rather high regard, and often bested the scholars in his realm in friendly matches. Legend has it there was an Indian King who was obsessed with chess. There’s a famous story that illustrates the extraordinary power of compound interest (once described by Albert Einstein as the 8th Wonder of the World). Have you ever wondered how the rich stay rich and how wealthy people just seem to attract more money?Ī big reason for this is compound interest. Well, this seemingly insignificant concept was allegedly referred to by Einstein as the ‘eighth wonder of the world’. You might be thinking, what’s all the fuss about? Simply put, compound interest is when you earn a return on your money and you continue to earn interest on that interest. What is compound interest in simple words? ![]() Keep reading for all the details or click on a link to jump straight to a section… More importantly, I’ll share some tips on using it to your advantage with your investments. But, if the concept is new to you, prepare to have your mind blown.Ĭompounding returns is the secret ingredient to building long-term wealth and I’m going to tell you exactly how it works. If you’ve already started investing, you’re probably familiar with compound interest. ![]() Investments What is compound interest and how does the magic work? ![]()
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