Power of Compounding - पैसे का सबसे बड़ा राज़ - YouTube

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Namaskar, my name is Mukul and welcome to AssetYogi

where we unlock and not lock knowledge of finance.

You must have always heard an English idiom "Hard work pays off"

but, does it really?

Do really hard work pays?

Hard work, if you analyze who does the most?

Maybe, the maid in your house does a lot of hard work.

Maybe, construction labor does a lot of hard work.

Maybe, auto-rickshaw driver on road does a lot of hard work

but does that pays them off?

So I think more than hard work smart work becomes more important.

Now if we further divide smart work, so what is the meaning of smart work?

does it not comprise of hard work?

Hard work comprises smart work, but if you could achieve more in a small amount of time

we call it as smart work.

what is the reason for smart work to happen?

One is your education with which you increase your knowledge and skills.

You are using your brainpower, so we call it smart work.

But there is something more to it we call money sense.

You need not be a genius for having a money sense.

There are many examples of those who are very intelligent and genius people

maybe you might also have seen such examples around you

who are not that rich and don't have a lot of money sense.

May as well see some examples who are not that smart but have a good money sense.

So what is the money sense afterall?

If you understand power of compunding

So I think maybe you already know a very big secret

and you have a little understanding of money.

So in this video, I will talk to you about money sense i.e power of compounding

which is so important

that if you impliment a little in your life

you might need not work for money anymore. Money will start working for you.

So let's go and understand this biggest secret of money.

Let's go to the black board.

I'll explain to you the power of compounding with the help of a short story.

Once there was a benevolent king for whom his word was of utmost importance.

His belief was words are more important than your life and they must be kept, even if you have to sacrifice your life.

There comes a poet who manages to impress him by his poem.

Now this poet was very smart.

The king tells him he was very impressed by his poems and asks for a wish

or express any desire he had and that he would fulfill it a hundred percent.

So as the poet was very smart, the king at that time was playing a game of chess

So the poet says I don't want a lot of things

all i want is few grains of rice.

The king asks how many grains do you want?

So the poet replies, I only want that many grains that if you

put grain in the first block of this chessboard

and double the amount in the second block and then again double it in the third block.

That means that the double amount will now be quadruple.

Then in the fourth block make it 8 times, 16 times in the fifth one

and so keep on doubling the amount in the next blocks.

So as you keep doubling the amount, I will take whatever sums up in the last block.

The king says, only this much and so simple! Okay, your wish is granted.

Now you would say what's the big deal in this? He just asked for a few grains of rice.

No, it's not like that, it's a matter of calculation to find the final amount.

So see here, it is getting double so it is 2 raised to the power 1

and this is basically 2 raise to the power 2

The same way if you keep on doubling the final amount that we'll get is

2 raise to the power 63 right? as there are a total of 64 boxes on the board

so it would be 2 raise to the power 64-1

here is 2 raised to the power 0 and here 2 raise to the power 1

so in the second box, it's coming 2 raised to the power 1.

That means 1 less than the total number of the box, so we will take one less in the exponent.

Now let's see how much this number 2 to the power 63 is and let's calculate it

and try understand it.

So I'll break 2 to the 63 into 2 to the power 32 multiplied by 2 to the power 31.

Now if you will try to calculate 2 to the power 32 in excel the final amount would be

equal to four hundred twenty nine crore.

And 2 to the power 31 will amount to two hundred fifteen crore right?

Now when you take the product of this figure, it will amount to

Nine two two three five multiplied by 10 to the power fourteen.

That means Ninety-two thousand two hundred thirty-five crore, crore.

Saying crore two times here.

Now see let's try to calculate the amount in rupee.

These were the total number of rice grains right?

Now if you will research a little there are fifty thousand grains in one kg of rice.

Rice grain is approximately fifty thousand in a kilogram.

So now if we calculate this number of grains to kilograms.

We will now divide this by fifty thousand right?

So this many kilograms amount of rice you will get alright.

And now if calculate this so this amount is

basically 1.85 multiplied by 10 to the power fourteen kg.

So you have this much amount of rice.

Now let's say we calculate this much into the rupee

and suppose accoridng to current rate rice cost Rs 50 per kg.

I'll multiply this with fifty.

So this will amount to Rs 92.235 multiplied by 10 to the power 14.

So now you try to calculate how much this rice will cost.

let me show you how this is compared to

if you divide this by 70 and try to find the amount in Dollars (USD).

If you would divide it by 70 and suppose the current rate is 70 Rupee for 1 Dollar then

it would amount to 1.318 multiplied by 10 to the power 14 Dollars.

Now if you look at this, 1 Trillion Dollars has 10 to the power 12.

So if I write this in terms of trillions this would be 132 trillion dollars.

Can you understand how much is this amount?

In the year 2017, do you know what was the world GDP?

The world's GDP was approximately 80 trillion dollars.

I'll write here 80 trillion dollars, this is more than that.

You can understand that what type of calculation is happening here.

Now see what is happening here.

So there is a 100 percent growth in evey block

meaning basically the rate of return is 100 percent here

and period here n is 63.

So see here, because

it has doubled 63 times right? 2 to the power 63 means doubled 63 times.

So this rate of return and this period is so important when compounding.

Now let me explain this with the help of one more example.

Compound interest is so important that Einstein once said

“Compound interest is the eighth wonder of the world.

He who understands it earns it … he who doesn't … pays it.”

Now, If we look into the depth of this matter...

In the present time if you take a credit card, so you let's say

pay a credit interest of 30 to 40 percent right?

So if you pay this much interest

your wealth will not just reduce but slowly reduce to so less

that basically if are rich you could end up poor, this high credit card charges interest rates.

Similarly, if you take a personal loan at an interest rate of 15-20 percent

So you can't be rich and there are high chances for you to get poor

if you keep on paying this much interest.

Okay I understand if you want this type of loan in case of an emergency

you can take these kinds of loans

but try not to make it a habbit.

Secondly, suppose you keep on earning this much and you own this credit card company

If you were earing 30-40 percent rate of interest

no one could stop you from being rich right?

So I am not saying you can earn a 30-40 percent rate of interest

but you can definately earn an interest rate of 15-20 percent.

If we talk about a 15-20 percent rate of interest this is not impossible.

Now, let us understand the difference between compound interest and simple interest.

The formula for simple interest is basically

interest = principal multiplied by rate of return multiplied by number of periods.

So when you calculate the amount of next year or next to next year

so you keep on adding interest amount to the principal amount.

For example, if have an initial investment of 1 lakh Rupee and

you get a rate of return of 15 percent in simple interest

So what kind of calculation do you get.

Suppose you have 1 lakh rupee on day 0 for how much will you have after one year?

so basically first you will calculate your interest rate.

Interest rate is principal into the rate of return into the number of periods.

So basically hundred thousand i.e 1 lakh rupee into the rate of return 15 percent

so i wrote 0.15 into number of period is 1.

So basically this is your Rs 15,000 interest

you will get this every year and it is fixed alright.

For you, only this interest will increase by Rs 15,000 annually.

So for the first year Rs 15,000 is extra on 1 lakh so

it adds up to 1 lakh 15 thousand after one year.

The next year add one more Rs 15,000 so the sum is now 1 lakh 30 thousand.

In the third year again add Rs 15,000.

In the same way, if you calculate for after 5 years it amounts to

1 lakh 75 thousand.

In the same way, you keep on investing, and let say you are 25 years old today

and so whenever you retire say after 35 years, and this is your present age, right?

So after 35 years with simple interest, you will get Rs 6 lakh 25 thousand right?

Now lets compare this with compound interest

the formula for compound interest is future value/final amount(A) equals to

P into one plus r raise to the power n. Here, n is now the power of the exponent.

So lets see how to calculate this

At day zero you have Rs one lakh right?

In the first year basically what you will do is for the amount.

I'll do and show you the calculation here

A equals to principal we have Rs one lakh

into 1 + 0.15 raise to the power 1 right?

So you will get Rs 1 lakh 15 thousand.

In the second year, the power will increase to two alright?

So this sums up to Rs 1 lakh 32 thousand 2 hundred 50 i.e little more than simple interest.

So now as your time will increases this difference will continue to increase.

See after 5 years with the simple interest you would earn Rs 1 lakh 75 thousand right.

And if you would have invested that money in the compound interest your amount would have been

more than Rs 2 lakh i.e., clearly a difference of Rs 25,000.

Now suppose you keep on earning a 15 percent return for 35 years.

To see how much your amount adds to.

It adds up Rs 1 crore 33 lakh 17 thousand

Now see how greater of a difference it is between simple and compound interest.

I haven't done anything you replace 2 to 35 alright.

You are earning returns up to 35 years at a rate of return of 15 percent.

If you will calculate this the value will come out to be Rs 1 crore 33 lakh 17 thousand.

Compared to Rs 1 crore 33 lakh 17 thousand, Rs 6 lakh 25 thousand is negligible.

Two things here are very important

one is your rate of return which is very important

second is your period,it is very important.

The more the time is the more you keep on earning.

In compounding you basically, like you earned 15 percent of the return right.

Here we added 15 percent now this is the new base amount and 15 percent of this is now earned.

Then you earned 15 percent on the new value, this is summing up like this.

Whatever if your final amount is you will earn 15 percent over it but

in simple interest, you are just adding Rs 15 thousand every year alright.

So for this reason Einstein also said compound interest is the 8th wonder of the world.

now if i show this to you

in the form of a chart, you can also see the plot.

See i have drawn this of 35 years

this is exponential curve of compound interest.

And in the blue color is the linear curve of simple interest.

See how much less you would earn after 35 years

and pay attention to one more thing

initially 5,6,7,8 in fact till 8 and 9 years there is not much of a difference right?

As the time increases see how exponentially your difference increased.

So I'm saying two things are important the rate of return and this period.

So after all what matters the most?

The formula for compound interest matters a lot.

Now, let's see what are the main factors in the formula.

First is P the principal amount that you initially invest right.

Then r is your rate of return and n is the number of periods.

So as I said earlier this rate of return and the number of periods is of utmost importance.

Now if you want to understand the depth of the matter a little more

i'll give you one more example.

Say you invest Rs 10 thousand monthly and earn an interest of 15 percent.

If you keep on investing for 35 years

suppose your present age is 25 years right

so you will retire at the age of 60

so if you keep on investing for 35 years

the total amount you will get after 35 years is

a whopping 14.67 crores.

You will get more than 14 crores if you keep on investing just Rs 10 thousand per month

and if you earn a rate of interest of 15 percent.

Now see I am not explaining the calculations in this video.

I already have made a lot of detailed videos on this subject.

See my video on future value

in that, you will get to know that if you do a one-time investment

so how can you do its calculation and determine its furture value right.

And the future value of the annuity is your regular investment

if you keep on investing some amount every month.

Regular meaning, you invest monthly, quarterly, or annually so how can you calculate the future value

Let's get back two this formula, three things that we said is important

So first, the principal amount is important that how much you invest upfront or

how much you invest monthly.

It's a natural thing that let say you were investing Rs 10 thousand per month and doubled it

to Rs 20 thousand per month.

So your 14 and a half crore will now become 29 crores, very simple.

Now, what does this principal amount depends upon?

simply it depends on your education, your skills and old money.

Old money is nothing but ancestral money or property or any other well-running business.

So definitely you will have some collected money.

And for this reason, although many people are not that smart but have a lot of ancestral money

and if they understand the power of compounding they keep on multiplying their money

and they don't work, their money keeps on working for them right.

So suppose you don't have a lot of initial amounts but you must be working somewhere

and earing something there.

You can increase your knowledge and skills, and naturally, your principal amount will increase.

The second important factor here is r, the rate of return.

What does rate of return depends upon?

Now, although I said to earn a 15 percent rate of interest it's not that easy of a task.

Definately you need some knowledge for this.

In share market people say its very easy and

they have earned 20- 25 percent 30- 35 percent interest but its not that easy afterall.

For that you need knowledge, keep on increasing your knowledge

definately i'm not saying that anything is impossible

but for that, you need to increase your financial knowledge and wisdom

only after that, you can earn a high rate of the return right.

The third factor here is the time period

which we talked about that period of investment is also very important.

Now like in our chessboard example we did 2 to the power 63 right

and we also took 100 percent returns.

First thing you can not earn 100 percent returns annually in real life right.

And the second thing will you be alive till you reach the age of 63

meaning is your career of 63 years?

Naturally this is not usually the case.

But yes! if this is the case then why not.

So basically this period depends on the fact how early you understand

the power of compounding.

If you understood the effect of the power of compounding very early on in life

let say you are just of 14 -15 year old and understand the concepts early.

So you will earn money early on and invest it early

so it might happen you don't need to work after the after of 30 or 40.

Money will earn for you this much that

money will work for you and you will never need to work for money anymore.

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