Interest on Interest - The Power of Compounding

The story goes when chess was presented to a great king, the king liked it and offered the inventor any reward that he wanted.

The inventor appeared humble when he asked for one grain of wheat (sometimes expressed in terms of rice grain) to be placed on the first square of the chessboard, then two grains on the second square, four grains on the third, and so on. Doubling each time until all 64 squares in the chessboard had been filled.

The king was surprised by such a small reward for a wonderful game, and ordered to give the inventor the requested grains. However, it became later clear to the king that the amount of grain requested can’t be paid.

On the entire chessboard there would be 2⁶⁴ -1 = 18,446,744,073,709,551,615 grains of wheat, weighing trillions of metric tons.

Similarly, interest on interest or the power of compound interest will make a sum grow faster than simple interest, which is calculated only on the principle amount.

Depending on how you use compound interest, it can be a powerful tool for building wealth since it makes savings grow faster. On the negative side, it is a devastating instrument for destroying wealth as it makes debt grow quicker.

The tool will help you determine how much your money can grow using the power of compound interest.

NOTE: Payments are assumed to take place at the end of each compounding period.