The Magic Of Compound Interest.

The story about the creation of chess has been told in many different ways, this is just one of them...

A king was experiencing a long period of peace, after many years of battle. Bored, and looking to demonstrate his martial prowess, the king instructed his wise-men to find a game that could be played to keep his generals sharp, and aware of his fearsome intellect. The wise-men first brought the King Checkers, which the king believed was "fit for children". They then tried Backgammon, which suffered the same fate. After months of searching, the wise-men found a shrewd pre-calc 11 student who believed that they had just the game for the King, chess. The King fell in love. After hours of chess, the king cheered "Student! You have done me well. Name any reward, and you shall have it. But do not make me an offer too large or I shall fail you from this class. You have one day, then tell me what you desire". After studying overnight the student devised a plan. "My wise King, I do not want to take advantage. I ask from you one simple thing. Place a coin on the first tile of this board, and then double this sum every month, after the board has been filled I will claim my reward" The Grade 11 student would earn 1 dollar the first month, 2 dollars the second, 4 on the third, and so on...

The King was a genius military leader, but this skill had come at the expense of his Math lessons. The King granted the student this reward and learned of his mistake months afterward... How did he not understand the power of compound interest?

Image result for money on chess board compound interest

On the first day, the student would have earned 1 dollar. At the start of the 2nd month, 1+2; 3rd month: 1+2+4; 4th month, 1+2+4+8,... and so on. After 63 tiles had been filled the student will have earned 18,446,744,073,709,551,615 dollars, more than the entire kingdom. There was a new ruler now. 

This story shows the power of compound interest, money that is left on the table to grow, can become vast over time. It is no exaggeration when I say this has created immense wealth, it's a secret that the rich understand.

Image result for net worth of warren buffet graph

Warren Buffet understands the power of compound interest, and he is currently worth 94 billion dollars because of it. But compound interest takes time, you won't see the results right away. It was only after 40 years of patience that Mr. Buffet started to see large increases to his wealth. 

So how does compound interest work? What is the magic formula that can make billionaires, and dethrone kings? That is for another lesson. 

Last modified: Monday, 8 October 2018, 6:31 PM