law of compounding roseanna sunley

In one of my recent posts (My Super-Simple 4 Step Guide to Building Wealth) I mentioned that I would explain the law of compounding, and why it’s so friggin awesome, in a future post.

Well, the future is here!

The Law of Compounding

I hope you’re comfy and have a cup of [insert your favorite beverage here] in your hand because I have a little story for you.

Once upon a time, there was a King. Let’s call him Nevil.

King Nevil wanted to reward a peasant who had saved his daughter’s life.

“You can have anything your heart desires,” he bellowed.

The peasant asked that a single grain of rice be placed on a single square of a chessboard.

King Nevil and his courtiers burst out in hysterics at such a small request.

Once they had all finished laughing, the peasant continued and added that the number of grains must double each day and be placed on another square of the chessboard, until all the squares were filled.

The King thought this was a ridiculous request, but nevertheless, he agreed.

However, by the time they reached the 64th square, there wasn’t enough rice in the kingdom, so King Nevil had the peasant hanged. (…because that’s what everyone does when they run out of rice!)

The End.

I don’t know if that story is true, but its factual correctness is irrelevant to the point I’m trying to make. (However, I can tell you that the King’s name is most certainly not Nevil – I made that part up.)

The story demonstrates the law of compounding and helps illustrate why Einstein described it as the most powerful force in the universe and the 8th wonder of the world.

I bet you’re thinking, how did the kingdom run out of rice? That’s exactly what I thought when I read the story and, at first, I assumed that they were exaggerating to make a point. Buts let’s do the math.

A chessboard is 8 squares x 8 squares, totaling 64 squares.

The first square gets 1 grain of rice, and then it’s doubled each time.

SQUARERICE ON SQUARETOTAL RICE ON BOARD
1                                                             1                                                 1
2                                                             2                                                 3
3                                                             4                                                 7
4                                                             8                                               15
5                                                           16                                               31
6                                                           32                                               63
7                                                           64                                             127
8                                                         128                                             255
9                                                         256                                             511
10                                                         512                                          1,023
11                                                      1,024                                          2,047
12                                                      2,048                                          4,095
13                                                      4,096                                          8,191
14                                                      8,192                                        16,383
15                                                    16,384                                        32,767
16                                                    32,768                                        65,535
17                                                    65,536                                      131,071
18                                                  131,072                                      262,143
19                                                  262,144                                      524,287
20                                                  524,288                                   1,048,575
21                                               1,048,576                                   2,097,151
22                                               2,097,152                                   4,194,303
23                                               4,194,304                                   8,388,607
24                                               8,388,608                                 16,777,215
25                                             16,777,216                                 33,554,431
26                                             33,554,432                                 67,108,863
27                                             67,108,864                               134,217,727
28                                           134,217,728                               268,435,455
29                                           268,435,456                               536,870,911
30                                           536,870,912                            1,073,741,823
31                                        1,073,741,824                            2,147,483,647
32                                        2,147,483,648                            4,294,967,295
33                                        4,294,967,296                            8,589,934,591
34                                        8,589,934,592                          17,179,869,183
35                                      17,179,869,184                          34,359,738,367
36                                      34,359,738,368                          68,719,476,735
37                                      68,719,476,736                        137,438,953,471
38                                    137,438,953,472                        274,877,906,943
39                                    274,877,906,944                        549,755,813,887
40                                    549,755,813,888                     1,099,511,627,775
41                                 1,099,511,627,776                     2,199,023,255,551
42                                 2,199,023,255,552                     4,398,046,511,103
43                                 4,398,046,511,104                     8,796,093,022,207
44                                 8,796,093,022,208                   17,592,186,044,415
45                               17,592,186,044,416                   35,184,372,088,831
46                               35,184,372,088,832                   70,368,744,177,663
47                               70,368,744,177,664                 140,737,488,355,327
48                             140,737,488,355,328                 281,474,976,710,655
49                             281,474,976,710,656                 562,949,953,421,311
50                             562,949,953,421,312              1,125,899,906,842,620
51                          1,125,899,906,842,620              2,251,799,813,685,250
52                          2,251,799,813,685,250              4,503,599,627,370,490
53                          4,503,599,627,370,500              9,007,199,254,740,990
54                          9,007,199,254,740,990            18,014,398,509,482,000
55                        18,014,398,509,482,000            36,028,797,018,964,000
56                        36,028,797,018,964,000            72,057,594,037,927,900
57                        72,057,594,037,927,900          144,115,188,075,856,000
58                      144,115,188,075,856,000          288,230,376,151,712,000
59                      288,230,376,151,712,000          576,460,752,303,423,000
60                      576,460,752,303,423,000       1,152,921,504,606,850,000
61                   1,152,921,504,606,850,000       2,305,843,009,213,690,000
62                   2,305,843,009,213,690,000       4,611,686,018,427,390,000
63                   4,611,686,018,427,390,000       9,223,372,036,854,780,000
64                   9,223,372,036,854,780,000     18,446,744,073,709,600,000

18,446,744,073,709,600,000! (I’m glad I don’t have to pronounce that number.)

That’s a shed load of rice! …or should I say a kingdom load?

The law of compounding is multiplying growth on top of growth, and as you can see, the impact can be huge.

How does this help you?

Compounding is a universal law that applies to assets, investments, interest, savings, cash flow, business, branding, education, time, habits, and even knowledge!

Each time, you think you’re getting just one grain of rice, when in actual fact, you’re getting a lot more.

Let’s apply the law of compounding to some modern-day scenarios.

Investments

You have £100 and you’re going to invest into an account which gives a return of 10%. (The average rate of return for the S&P500 – the top 500 companies in the US – has been around 10% dating back to the 1920s.)

Here’s what would happen…

YearReturn at 10%Total Money
00 £     100.00
1 £       10.00 £     110.00
2 £       11.00 £     121.00
3 £       12.10 £     133.10
4 £       13.31 £     146.41
5 £       14.64 £     161.05
6 £       16.11 £     177.16
7 £       17.72 £     194.87
8 £       19.49 £     214.36
9 £       21.44 £     235.79
10 £       23.58 £     259.37
11 £       25.94 £     285.31
12 £       28.53 £     313.84
13 £       31.38 £     345.23
14 £       34.52 £     379.75
15 £       37.97 £     417.72
16 £       41.77 £     459.50
17 £       45.95 £     505.45
18 £       50.54 £     555.99
19 £       55.60 £     611.59
20 £       61.16 £     672.75
21 £       67.27 £     740.02
22 £       74.00 £     814.03
23 £       81.40 £     895.43
24 £       89.54 £     984.97
25 £       98.50 £  1,083.47
26 £     108.35 £  1,191.82
27 £     119.18 £  1,311.00
28 £     131.10 £  1,442.10
29 £     144.21 £  1,586.31
30 £     158.63 £  1,744.94

It’s important to point out that no extra money was invested. You put in only £100 and you left it.

In the first year, your 10% return was only £10, but in year 30, your 10% return was £158.63, almost 60% more than your starting investment!

Why is this?

…because you are getting growth on top of growth!

People expect to get a £10 return every year, calculating a total return of only £300 for the full 30-year period. When in actual fact, your total return (minus your initial investment) was £1,644.94, an increase of over 1700%!

Not too shabby!

Self-improvement

When most people decide to improve themselves, they try to make huge earth-shattering changes.

This strategy almost never works because it’s too much too quickly.

But how about if we focus on just improving ourselves by 1% every day? At the end of the year, we would have improved by over 3770% (if my maths serves me correctly).

As you can see, even the smallest changes to your lifestyle and daily routines can have huge effects.

Flying a plane

Okay, so I’m assuming that most people who are reading this are not pilots, but just hear me out because this is a good example.

Imagine you’re flying from LA to New York. If, when you leave LA, you point the plane just 1% off-course to the south, instead of landing in New York, you’ll touch ground in Delaware.

That tiny, almost insignificant and invisible adjustment, landed you 150-miles off target.

The catalyst

There is one thing that makes the law of compounding work, and that’s TIME.

The more time you have, the greater the rate of your return.

This is not a strategy for quick wins. This is a strategy for patient people who chip away slowly over time.

As you can see, these small percentages aren’t enough to make you take notice in the beginning, it’s only at the end where its multiplying effect can easily be seen.

The thing to remember about the law of compounding is that the results are rear-loaded. This means you get the maximum benefit at the end, not at the beginning. So, when it comes to investing or making positive changes, the longer you are able to do it, the better.

Recommended read

In this post, I’ve just touched the tip of the iceberg. If you want to learn more about the law of compounding and how you can work in your favor, then the book I would recommend to you is The Compound Effect by Darren Hardy.

You can check out my full review of the book by clicking here.

It’s a super book! Simple to read and easy to implement. I rated it 10/10.

…I may have stolen a few examples from his book for this post, but shhhh, don’t tell him. 🤫

Final thoughts

Almost every successful person is leveraging this law, whether it be in building their wealth, building their bodies and mindest, or building positive habits.

You will achieve a whole lot more (and it will be a whole lot easier) once you understand the core principles of compounding.

As Einstein said, it really is the 8th Wonder of the World.

Roseanna x

P.S. If you have any questions (or would like to point out any incorrect calculation I may have made 😅) please pop them in the comments box below.

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Roseanna
Currently winging my way through life and putting most of it on the internet. This is my personal website where I share my business book reviews, my adventure tips and stories, and my general musings on life as a solo entrepreneur.

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