Coronavirus Pandemic in 2020 and the Compounding Effect

” And if you keep on just reinvesting those returns for just ten years then on the last year, your received interest would be 2,35,794 INR and the total balance would be 25,93,742 INR or in words, Twenty Five Lakhs Ninety-Three Thousand Seven Hundred and Forty-Two Only. “

When India witnessed its first people’s curfew or the ‘Janta curfew’ due to the coronavirus pandemic at the very end of March, the number of coronavirus infected cases in India was in the hundreds and the coronavirus pandemic still hasn’t wreaked havoc in the world.

And now in mid-May, we have broken some serious records in case of the coronavirus infection and the number of infected people. From hundreds of cases to now nearly breaking the Lakh mark, or by the time you read this article we might have crossed that mark too.

So how did the world drown in the coronavirus pandemic and what does compounding has to do with it?

Story of the Chess and Rice

When the inventor of Chess introduced the game to his king, the king was impressed with the game and asked the inventor of the game to demand his reward from the king. The clever inventor asked the king for rice and the measurement should be done by putting a single grain of rice in the first square of the chessboard and just doubling the grain of rice every next square.

So it would go like, 1 grain on the first square then 2 grains on the second square then 4 grains on the third square then 8 grains on the fourth square, and so on and so forth.

The king laughed and granted the inventor’s wish without knowing the dark cloud that was looming in the demand. The king came to know about the blunder he has done by granting his wish when the whole kingdom’s rice fell short of completely filling the 64th square. In the end, the king bowed down to the brain of the inventor and made him one of the gems of his ministry.

If you would calculate the cost of rice required to fill and complete all the 64 squares, then the cost would come in trillions of dollars in today’s terms.

Umbrella Corp – The Coronavirus Pandemic

The virus came to India through a few visiting foreign tourists. But quickly spread to the people that came in contact with those tourists. At first, we saw very few people getting infected each day, those numbers were within 100. But within a month, the number of people infected jumped from a few 100s to more than 1000 a day. And at the time of writing the article, we are even seeing more than 5000 new cases each day.

The Goal in life – REPRODUCE

All living beings on earth are designed to do just one thing and that is to pass on the genetic data they are carrying within themselves.

In the case of us humans, we pass on our genetic data or our DNA to our successors and in the case of the coronavirus, it is their RNA. They had only one job to do and that was to inject their genetic information into any other living cells so their genetic data keeps on going forever.

When the infected foreign tourists first came to India, inside their bodies the coronavirus cells were multiplying and the virus had to ensure that their RNA information had the highest chance of getting duplicated. And this multiplication is the cause of the coronavirus pandemic.

And for that, they had to infect more human bodies. So they found an easy way of transmitting that RNA information was, through our eyes, nose, or mouth. And if you are wondering whether they succeed or not, then I have to say-
Damn, they did!

The Relation

At first, the coronavirus had very few hosts. So the number of people infected each day was also low. As time went by, the number of infected people grew so did the daily number of infections. And this is where the compounding effects come in. Or to be more precise, the compounding in the rate of infection.

Let me help you understand the concept with a small example.

Let us say, each infected people is spreading the coronavirus to at least 2 new people. So one person who is infected with the coronavirus will infect another 2 new people. Now the total number of infected people has increased from just 1 to 3. That is a 300% increment in the number of infected people.

Now those 3 new infected people will be spreading and infecting 2 new people each. So now the total number of infected people has jumped from 3 people directly to 6 newly infected people + 3 previously infected people. Making the total number of infected people to 9.

So you get the idea of how quickly things can go out of hand. And this is the main concept of the compounding effect and another reason for the coronavirus pandemic.

In this case, the old infected people are also infecting new people, as well as the newly infected people now, are also spreading the virus to healthy human beings. So as the number of infected people grows so does the daily number of newly infected people.

And this growth is exponential or commonly known as hockey stick growth, as the graph looks like a hockey stick. The growth starts slowly, with time the rate of growth rises significantly.

And you may ask how does it relates to your personal finance!

Well, to start with, the coronavirus has brought the world economy to its knees.
That was an adverse effect of the coronavirus. But we are here to talk about the compounding effect of the spreading of the coronavirus.

As we saw, each newly infected person was a new spreader of the coronavirus, increasing the number of newly infected people each day. And each of your pennies can do the same.

Let us say, you invested 100 rupees, and in return that 100 rupees brought 10 more rupees, so the rate of growth is 10 percent. (10% of 100 is 10). Now not only those principal 100 rupees are going to bring you another more 10 rupees but the previously earned 10 rupees are also going to bring you new money. So now, your newly earned interest won’t be just 10 rupees but 11 rupees {(100+10) x 10% = 11}. So you see, each time you will be receiving more money than you received previously.

If the newly earned money were not bringing you new money then each time you would have only received just 10 rupees on the 100 rupees invested. And it would have only grown in a linear way. And we want the growth of our money to follow the exponential curve. Earning each time more than we did previously.

The Answer Always lies in the Question

In the example of the Chessboard and rice grain we saw at the beginning, why was it so hard to fill the 64th square?

Well, the answer was in the rate of growth.

The inventor of the game asked his king to DOUBLE the grain of rice in each square. Or in simple terms, the rate of growth was 100%.

The very first square had only a single grain of rice, but the very next square according to the demand of the inventor should contain double the previous square, so the 100% of 1 is 1, so the second square had 2 rice grains. Following the same logic, in the third square, there should be {(2 x 100%) + 2} or 4 rice grains.

Or there is a much easier way to calculate it. Calculating 2 with the corresponding power of the square.

The first square had only a grain of rice. So the next square will be 2¹ = 2 grains of rice. Very next square, 2² = 2 x 2 = 4 grains of rice. The fourth square should contain 2³ = 2 x 2 x 2 = 8 grains of rice. So on and so forth.

When you reach the 64th square of the chessboard, the power of 2 would look like 2⁶³.
Just pause for a moment and bring out the calculator app to calculate the number!

For all the lazy bums,
the answer to 2⁶³ is 92,23,37,20,36,85,47,75,808.

So, just the 64th square will contain 92,23,37,20,36,85,47,75,808 grains of rice.
For a perspective, a kilogram of rice contains approximately 55000 grains.

No one would have thought watching the third and the fourth square, that the 64th square would have contained such a huge number of rice grains.
In the case of the coronavirus pandemic, the infection started pretty slowly but as time went by the number of infected people increased on an exponential rate, similar to the story of chess and rice grains.

And in personal finance, we should always try to grow our money at an exponential rate. To achieve that, reinvesting the return earned from the previous investment is very important.

In the case of the coronavirus, if the newly infected people were not infecting any new healthy human being then the growth would have been pretty linear and we would have managed to contain the spread of the disease, but that is not how infection works.

Same with our money, you should look at each penny like soldiers, recruiting new soldiers to your barrack each day. And the cycle should go on.

Reinvesting the returns earned from any kind of investment vehicle or any kind of assets should be your target.
We have discussed how long term holding and reinvesting returns affect your wealth in this article.

Story of ITC Share Price & Dividend Declared Since 2000

Examples are the Best Teacher

In a real-life scenario,

If you had invested 10 Lakh rupees in an investment vehicle growing at a rate of 10 percent per annum. Then each year you would be receiving a lakh as a return.

Instead of eating up the return for personal needs, if you could reinvest those returns in the same investment vehicle growing at a rate of 10 percent per annum, then the next year you won’t be receiving just a lakh as interest but 1 Lakh and 10 thousand rupees as interest and increasing each passing year.
And if you keep on just reinvesting those returns for just ten years then on the last year, your received interest would be 2,35,794 INR and the total balance would be 25,93,742 INR or in words, Twenty Five Lakhs Ninety-Three Thousand Seven Hundred and Forty-Two Only.

Here is how those ten years would look like-

Year	Yearly Interest	Total Interest Earned	End Balance
1	₹1,00,000	₹1,00,000	₹11,00,000
2	₹1,10,000	₹2,10,000	₹12,10,000
3	₹1,21,000	₹3,31,000	₹13,31,000
4	₹1,33,100	₹4,64,100	₹14,64,100
5	₹1,46,410	₹6,10,510	₹16,10,510
6	₹1,61,051	₹7,71,561	₹17,71,561
7	₹1,77,156	₹9,48,717	₹19,48,717
8	₹1,94,871	₹11,43,588	₹21,43,588
9	₹2,14,358	₹13,57,947	₹23,57,947
10	₹2,35,794	₹15,93,742	₹25,93,742

All you did was invest 10 Lakhs rupees in an investment vehicle growing at a rate of 10 percent and reinvest those yearly interest back. And if you just keep on doing it not just for 10 years but 20, then the final balance will be a whopping 67,27,500 INR.

Conclusion

And in real life, you won’t be investing just 10 Lakhs or just for 10 years. Only compound interest can grow your wealth multi-fold and that is why the rich always become richer the next day. Their assets are always recruiting new soldiers in their barracks and the cycle keeps on going. And you should strive for that too.

And as Einstein said ” Compound Interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it. “

And if you are new to the subject of compound interest then you should read THE COMPOUND EFFECT by Darren Hardy or The Latte Factor by David Bach or try the Kindle version in the lockdown for coronavirus pandemic. Be safe.

#stayhomestaysafe

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