‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’ Albert Einstein.
What would you choose if someone offered you 100 million shillings today or one shilling that doubles every day for 30 days?
Well, if you are like most people, you may be tempted to choose 100 million shillings. But, the reality is that it is better to choose the latter. On the second day, the one shilling will turn into two shillings. On the third day, it will become four shillings. By the tenth day, you will have only 512 shillings. Things will look desperate at this point as you have nothing much to show compared to the person who took the 100 million shillings.
Things begin to get interesting on day 21 when you cross the one million shilling mark. With only nine days to go, you are very far from the hundred million mark which your friend got. You only pass the hundred million mark on day 28. Something weird happens in the last two days. You double your fortunes consecutively, and you end up with over 500 million shillings!
So how did all this happen? How can one shilling become more significant than 100 million in 30 days? Small gains, when compounded, follow an exponential path. The exponential course starts slowly and then rapidly builds up towards the end. The same thing happens with saving and investing money. Initially, saving 100k seems insignificant, but over time it adds up. Starting your small business is hard, and you may not register any visible progress for years. Yet, at some point, everyone will wonder how you became rich. Reading every day seems inconsequential, but in a few years, you become very knowledgeable.
Saving and investing money is an exponential game. When you understand this, you are on your way to financial freedom.