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"The Most Powerful Force in the Universe is the Power Of Compounding Interest" - Albert Einstein
What is compounding interest?
In order to illustrate the effect of compounding interest, let us do some exercise. First,get yourself a sheet of paper,as large as possible. What you do with this paper is to start folding one edge to the opposite edge and count how many times you can fold the paper until you cannot fold it anymore. Theoretically, you should only be able to fold it up to 7 times. Now,compare the thickness of this paper against the thickness of the paper when you first started out. What you have here is called the effect of compounding thickness.
What you have just done just now is to compound the thickness of the paper at 100% (or double) every time you fold it.
Mathematical Explanation using geometric progression:
t(2.00)^n = T
where t is the initial thickness
n is the number of times you fold the paper
T is the final thickness
2.00 is the number used for it is the constant compounding rate. (Keyword:Constant)
In case you want to know, taking the average thickness of A4 paper at 0.10mm, and the number of time of folding as 7. The final thickness of your paper is now 12.8 mm. Which is 128 times thicker than your original thickness.
Now,you will be wondering what has paper folding got to do with investment. In fact, it is the key to a successful investing journey. Just imagine if you could replicate the above situation into your investment portfolio. By using the same formula,with
t as your starting capital
n as the number of years
T as your results
you may change 2 to other number (1 + ROI/100) but to illustrate how wealthy you can be,we will use 2.00.
Now,let's perform some simple calculation,
Let's imagine if you are 20 years old, and you're only have a savings of 10,000 MYR that can be put aside to be invested. Compound it at 100% per year over 10 years. If you're with me just now, you should come to an amount of MYR10,240,000!!!. Turning 10,000 into 10 Million in reinvest-able cash/equity, not bad for a young adult, how many people ever have even 1 Million in cash/equity in their lifetime! However,let's all be realistic. A 100% gain for 1 year is not easy and in fact,you need a little bit of luck to achieve that. But to achieve that results consistently for 10 years, it doesn't sound achievable. But what you can achieve is 10-50% if you follow the correct method and do your due diligence. It might take a longer time but the rewards are sweet. If you want the fruits, you must first plant the seed and nurture the plant.