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On compound interest September 26, 2007

Posted by Sharath Rao in policy.

I remember reading somewhere ( and I hate starting sentences in that manner ) about how Benjamin Franklin is probably the most highly regarded American ever. Now something really cool from him.

Ben Franklin used the power of compound interest. Back in 1783, when Ben was 77, he added a new section to his will. He set up a codicil that was to last for 200 years after his death. Ben allotted $5,000 each to his favorite cities of Boston and Philadelphia. …

Each city’s fund, according to Ben’s will, operated for 200 years. After 100 years, each city could withdraw $500,000 from their funds and use the money for public works. The rest of the money would still be working for another hundred years.

Five thousand dollars isn’t a lot of money today, but stop and think: How much was each fund worth at the end of the 200 years (1991)? Need an aspirin? How about more than $20 million! And that was after each city took out half-a-million for public works.

Yes, now imagine that cute niece that you really really love. You can of course do her lot of good and give her an expensive toy costing say Rs. 2000. But then most people would be giving her toys anyway. But maybe you can stash away Rs. 2000 that at the rate of 9% annually compounded will give her either Rs. 16000 when she is 25 ( for that marriage jewellery) or 32000 when she is 33 or 5,00,000 at her retirement. (65 years)

I know you will hate me for even thinking along these lines. I know its not all about money and that you cannot put a number on everything. But its also true that the extra pleasure of having that one more toy barely counts or is cherished. And lets all be honest now – How many of you would rather have that expensive toy at age 1 or 5,00,000 when you are 65. Remember its not just having the amount at 65 but also that you have to save some amount less every month of your working life (25-65 years) because you have that Rs. 5,00,000 waiting there already at retirement. (which further invested will guarantee sizable monthly interest payments)

Being a little hard-hearted every once a while sure goes a long way.



1. Joy - September 26, 2007

Reminds me of something I read somewhere about Warren Buffett and how he got people to invest in his ‘compound interest machine’ Berkshire Hathaway…by using a slide ruler and making people believe in the *miracle* of compound interest. πŸ™‚

2. Ravi - September 26, 2007

i love this, the economics behind the market, especially at this moment when the indian stock markets are soaring like never before! alongside, I’ve presented close ended MF certificates at certain birthdays and got cursed for!

3. Sharath Rao - September 26, 2007

@ravi : “Ravi, forgive them, for they do not know what they are doing” πŸ™‚

@joy : thanks, here is a relevant link – http://www.forbes.com/forbes/1998/1012/6208110a_print.html

4. Joy - September 27, 2007

Thanks Sharath. That’s *exactly* what I had read πŸ™‚

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