The topic for this post was inspired by an Audiobook I once listened to from Tony Robbins.
Now I am not very good at golf, but I got a couple mates who is a little better, but not too much, so if we were to play through a whole 18 hole course, with a bit of luck, it could go either way!
So let’s say on the day I was feeling rather confident, and being the competitive natured person I am, offered to take some little bets to spice things up.
So the bet would work like this, we will start with only 10 cents on the first hole, you know a nice warmup, and then we will double it on the second, and then double again on the third and so on. Sounds pretty reasonable doesn’t? I mean there is only 18 holes, just how much can the bet grow to? $20? maybe $50 even, I pay more for a nice dinner with my girlfriend!
Well let’s see how the bet increases on the first 9 holes:
Hole 1 10 cents
Hole 2 20 cents
Hole 3 40 cents
Hole 4 80 cents
Hole 5 $1.60
Hole 6 $3.20
Hole 7 $6.40
Hole 8 $12.80
Hole 9 $25.60
At the 9th hole, the bet is $25.60. We are already half way there,
so how much could it be on the 18th hole? Okay so it’s a bit more than my $50, but will it be $100? $300? $500? Let’s go
Hole 10 $51.20
Hole 11 $102.40
Hole 12 $204.80
Hole 13 $409.60
Hole 14 $819.20
Hole 15 $1,638
Hole 16 $3,276
Hole 17 $6,553
Hole 18 $13,107
As you can see on the 18th hole, the bet becomes a whopping $13,107! When given enough time, the power of compounding can turn very small amounts of money into huge sums.
A more important lesson I want to illustrate is that initially, the money grows very slowly. Even at the halfway mark, it is only $25.60. However, the moment it reaches a critical point, the growth becomes exponential! In fact, between Hole 15 and Hole 18, within just 3 holes, it grows from $1,638 to $13,107, a $11,469 difference!
What this also means is that, if we only started betting from the 3rd hole, the total amount of the last bet would only be $1,638 as opposed to $13,107, in terms of real life finance, imagine the difference of starting your investing at age 18 and age 25!
Another important feature of compounding is that, even if I lose the first 17 holes, if only I just win the 18th hole, I will cover my loses! Now isn’t that amazing?
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