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Thursday, March 30, 2006

The MathMagic of Compounding or Kaise Banoonga Crorepati:

The Great Indian Dream is to become a Crorepati. The deep-seated nature of the Crorepati phenomenon can be judged from the popularity of the TV program hosted by Amitabj Bachchan titled, "Kaun Banega Crorepati".

Kaun Banega Crorepati provided a pathway to become a Crorepati. However, it was more like playing the lottery followed by answering some esoterica and the chances of many people becoming a crorepati was very small.

In this article we will try to elaborate upon an simple, easy and ethical pathway to become a crorepati. We will use the MathMagic of Compounding to get there.

Consider that you start with Rs. 100,000. If you put into an investment that returns 10% per year you will get Rs. 10,000 as the return in the first year. If you put this return into the same investment then the starting amount for next year will be Rs. 110,000. If you get 10% return on this amount then it will be Rs. 11,000. Now we can start seeing that the return every year is getting larger. If we keep adding these returns to the initial investment the return on returns will keep adding to our initial investment and the amount invested will grow.

Please note that we are not adding any more money from our pocket except the initial investment. The initial investment itself is providing more and more money to provide returns on. Of course, most of you learnt this sometime in highschool or earlier mathematics classes. The point is have you started applying this?

Lets apply it and see.

Years Money Return @ 10%
1 INR 100,000 INR 10,000
2 INR 110,000 INR 11,000
3 INR 121,000 INR 12,100
4 INR 133,100 INR 13,310
5 INR 146,410 INR 14,641
6 INR 161,051 INR 16,105
7 INR 177,156 INR 17,716
8 INR 194,872 INR 19,487
9 INR 214,359 INR 21,436
10 INR 235,795 INR 23,579
11 INR 259,374 INR 25,937
12 INR 285,312 INR 28,531
13 INR 313,843 INR 31,384
14 INR 345,227 INR 34,523
15 INR 379,750 INR 37,975
16 INR 417,725 INR 41,772
17 INR 459,497 INR 45,950
18 INR 505,447 INR 50,545
19 INR 555,992 INR 55,599
20 INR 611,591 INR 61,159
21 INR 672,750 INR 67,275
22 INR 740,025 INR 74,002
23 INR 814,027 INR 81,403
24 INR 895,430 INR 89,543
25 INR 984,973 INR 98,497
26 INR 1,083,471 INR 108,347
27 INR 1,191,818 INR 119,182
28 INR 1,310,999 INR 131,100
29 INR 1,442,099 INR 144,210
30 INR 1,586,309 INR 158,631
31 INR 1,744,940 INR 174,494
32 INR 1,919,434 INR 191,943
33 INR 2,111,378 INR 211,138
34 INR 2,322,515 INR 232,252
35 INR 2,554,767 INR 255,477
36 INR 2,810,244 INR 281,024
37 INR 3,091,268 INR 309,127
38 INR 3,400,395 INR 340,039
39 INR 3,740,434 INR 374,043
40 INR 4,114,478 INR 411,448
41 INR 4,525,926 INR 452,593
42 INR 4,978,518 INR 497,852
43 INR 5,476,370 INR 547,637
44 INR 6,024,007 INR 602,401
45 INR 6,626,408 INR 662,641
46 INR 7,289,048 INR 728,905
47 INR 8,017,953 INR 801,795
48 INR 8,819,749 INR 881,975
49 INR 9,701,723 INR 970,172
50 INR 10,671,896 INR 1,067,190

In fifty years time you are a Crorepati! So if your father had invested Rs. 100000 on your behalf when you were born you would be a Crorepati when you were 50! Of course, that might not excite a lot of you. Who wants to be a Crorepati at 50? You want to do that much earlier. Also you father did not invest that kind of money for you when you were born. Finally, which bank today is going to give you 10% returns on your FDs? Agreed!

So we will explore other ways to become Crorepati. But keep in mind the above mathmagic of compounding. With compounding and time on your side any roadpati has a chance to become crorepati. Keep watching this space for Kaise Banoonga Crorepati, Part II...

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