The Red Indians have emerged winners even after selling the entire Manhattan property for US $ 24. |
Albert Einstein called compound interest as the most powerful force in the universe In 1626, the Red Indians in the east coast of U.S.A, sold Manhattan , to a group of immigrants for $24 in beads and trinkets
For Centuries they were subject to a lot of criticism and comment because of the apparently low value of sale. But it appears that the Red Indians seem to have got a better deal than the people who bought the island. Assuming that the Indians were able to invest their sale proceeds into an 8% compounded rate of return the $24 compounded would have grown to $30 trillion in 1989 when the book was written.
As per the tax records of that time the entire real estate of Manhattan was worth only $28.1 billion.
Lynch argues that even if there are rampant under declarations and the entire property is worth $56.2 billion “the Indians would be ahead by $29 trillion and change”.
Assuming a two-percentage point lower interest rate the Indians would have still ended up with $34.7 billion without having to spend money on the maintenance and upkeep of Manhattan .
This example clearly brings out the power of compounding. Compounding is essentially reinvesting the earnings from a particular asset rather than spending it.
So, in the example taken above, 8% interest on $24 would have been $1.92.Now, instead of spending it, if the money were to be reinvested, the total principal would grow to $25.92. An 8% interest on this amount would be $2.07 around 15 cents more than the previous year.
What this example tells us is that it's important for an individual to start investing early, so as to give enough time to the money to compound.
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