Want to break you bank? Deposit a small amount for a long time

By MUNGAI KIHANYA

The Sunday Nation

Nairobi,

11 February 2007

Suppose you were asked to do press-ups in the following sequence: start with just one and then stand up; then go down, do two and stand up again; next, get to the floor, do three and get up again; and so on. How many times do you think you would manage? Five, ten, twenty…?

If you did five rounds, you would completed a total of 1 + 2 + 3 + 4 + 5 = 15 press-ups. And if you manage 10 cycles, the total would come to 55. Now do you think you can survive 20 rounds?

It is amazing how rapidly the numbers accumulate. In just ten rounds you have a total of over 50 press-ups. But if that sounds fast, consider this: start with one sheet of photocopy paper and fold it into two; then fold it into two a second time to make four layers; next fold a third time to get eight layers and so on.

If you folded it 10 times, you would have 1,024 layers with a thickness of about two reams of paper. In fact, considering the dimensions of the standard A4 sheet, it is not practically possible to get to tem folds – it becomes too thick to hold between the fingers. Try it!

This is also how money can also accumulate. Suppose you were given two options: either get sh10,000 now or collect one shilling today, then two tomorrow, three on the third day and so on until the end of one year when you collect you final installment of sh365. Which would you choose?

You might think that waiting for sh365 for a year is not wise but, in the second option, you total collection adds up to over sh66,000! This is much better than sh10,000.

Better still would be an offer to start with one shilling now, then double the amount every month for two years. That is, two shillings on the second month, sh4 on the third, sh8 on the fourth and so on. This simple sequence accumulates to over sh33 million in two years.

In the final month alone, you would get over sh16 million! You don’t believe it? Then take out your calculator and find out what 2 x 2 x 2 x 2 x….. 24 times works out to.

Because of this escalation, some countries have a limit on the duration that you can leave your money in an interest paying account. You can easily run the bank broke if you left your money too long. On the other hand, this is also why loans left unpaid accumulate into colossal sums in a short period of time.

But it is also the reason why you should start saving money early – from the very first salary. The bank interest only looks small when you think in the short term.