The Legendary Chess and the Rice Grain Story There is a famous story about chess that goes like this. There once was a King who was a chess enthusiast and an expert. He kept challenging everyone to beat him and finally one day a sage won over the king. The king offered to give him whatever reward the sage wanted. The sage asked as follows: “Oh! Emperor, my wishes are simple. I only wish for this. Give me one grain of rice for the first square of the chessboard, 2 grains for the next square, 4 grains for the next and so on, keep doubling the number of grains till the 64th square.” Without even thinking twice, the king ordered the servants to fulfill the wish of the sage. They started putting the grains on the chessboard. By the time they filled the 4th row, the king realized that he had committed something which he could not fulfill. Can you guess how many grains will be there on the 64th Square? 18,446,774,073,709,551,615 number of grains, and it was supposed to weigh 461,168,602,000 tons. This is around 1000 times the global production of rice in 2010. There are many versions of this story told by different people. But the moral of the story is the concept called “Power of Compounding.” Number of years we save is more important than the amount of money we save. Compounding Interest As we have seen in the earlier chapter, the simple formula "Rule of 72" helps us understand how the compounding effect takes place in investment. In the chess story, when the number of grains is doubled every square, by the time we reach the 8th square, 1 becomes 128. Our investments follow a similar pattern. The number of years required to double our investments depends on the interest rate we receive. The Rule of 72 helps us find out how many years it takes to double our investments based on the rate of return. The power of compounding is often called the eighth wonder of the world. Let’s understand why it is called the Eighth Wonder and even praised by Einstein himself. When we invest, one of the factors we consider is the Investment Return. All of us know the formula for Return on Investment (ROI). A = P*(1+r)n The “r” in the above equation is called the ROI (Return on Investment). While studying in school, this equation may seem simple, but applying it in real life can be difficult. For example, how do we calculate the return on a Fixed Deposit that doubles in 9 years? The equation is: 2000=1000(1+r)92000 = 1000 (1 + r)^9 To calculate r, we can simplify the above equation by applying the Rule of 72. Rule of 72 states that if an investment doubles in n number of years, then: r=72nr = \frac{72}{n}In this case, if the investment doubles in 9 years, we can calculate the rate of return as: r=729=8%r = \frac{72}{9} = 8\%So, the ROI is 8%, meaning the investment earns 8% per year to double in 9 years. Investment return = 72/n So a fixed deposit which doubles in 9 years will give a return ofR= 72/9 = 8%