I recently saw an interesting video that asked a number of regular people if they would rather have a million dollars now or take a penny now and double the amount every day for the next 30 days.
What would be your choice?
As expected, 90% of people chose the million dollars now option. I would have made this choice myself a few years ago. But this would have been the poorer choice, because you would have short changed yourself by over $4 million at the end of the 30 day period.
Don’t believe me? Look at penny table calculation on the right. The simple act of doubling your previous day’s investment can rapidly reap huge rewards thanks to the powerful concept known as compounding.
Now a 100% return every day is highly unlikely, but the principle of compounding holds true for even smaller returns (though it will take longer than a month to make your fortune).
This is why compounding is a core aspect of good personal finance and the reason why the rich get richer.
Basically it comes down to age old tenet – when you’re young, you have an asset money can’t buy: TIME. Start saving now and turn pocket change into riches.
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The Eight Wonder of The World
Compound interest has been called the eighth wonder of the world. And with good reason. It magically turns a little bit of money, invested wisely, into a whole lot of cash. Even Albert Einstein is said to have called it one of the greatest mathematical concepts of our time.
But you don’t need to be a genius to harness the power of compound interest. Even the most average of Joes can use it to make money, without having to know the theory of relativity.
Here’s the gist which you can clearly see in the penny table. When you save or invest, your money earns interest, or appreciates.
The next year, you earn interest on your original money and the interest from the first year. In the third year, you earn interest on your original money and the interest from the first two years.
And so on. It’s like a snowball effect – roll it down a snowy hill and it’ll build on itself to get bigger and bigger before you know it.
To make compounding work for you follow these three basic principles:
1. The sooner you start, the better. Compounding is a function of the return you get and time. For most people a 3 to 7 percent is realistic, but time is a diminishing commodity. So the younger you are, the more time you have to really make compounding work for you, and the wealthier you can become. The next best thing to starting early is starting now.
Consider this example: Amy, a 22-year-old university graduate, saves $300 per month into an account earning 10% per year for 6 years. Then at age 28, she starts a family and decides to stay home with the children full time. By then, Amy had kicked in $21,600 of her own money. But even if she doesn’t contribute another cent ever, her money would grow to a million bucks by the time she turned 65!
2. Make regular investments. Especially via a tax advantaged 401K or IRA plan or in a good high yield savings account for your post-tax savings. Remain disciplined, and make saving a priority. The more you save, the more you can let compounding work its magic. Even a little bit goes a long way, and you can start with as little as $20 a month.
Get your biggest tax refund, guaranteed. Get started today.
3. Be patient. Compounding only works if you allow your investment (capital) to grow. It takes time to see the wonders of compounding returns, and as you can see in the penny table the most growth comes at the very end.
Compounding creates a snowball of money and you will get rich if you start young, invest wisely and leave your money alone over the long term.
18 thoughts on “The Power of Compounding – $1 Million Now or Penny Doubling for a Month”
Been trying to do this but have lost more than wins because no one really knows what to best invest in without knowledge pointing the direction and that cost more money! Most information is controlled by those who are taking the profits of your “penny” and using it to get their pennies! Like my dad told me..’you need money to make money” but from that I have also learned you “must be willing to take it from someone else if you really want to be rich”. So much for the morals that we are told is more important.
You are so right.In my business class last night, my professor brought this up. She really bought into this idea, but in reality, she is an idiot. She tried to say that she did the math and you can become a millionaire in 1.5 years, no matter what your salary is. Well, theoretically, the table is saying you can become a millionaire in less than a month, so I don’t know what math she did. And the table is rhetorical, its not real. She told me that I just didn’t want it enough. She insulted me in front of the class for not having “drive”. The reality is, trying to save money like this is irresponsible because it is impossible to budget. I know that we live in a hidden caste system, so I will never be a millionaire, that is not something that I strive for. I do strive to set a budget for myself that is realistic, so that I can pay my mortgage, keep food on the table, pay for car repairs, go on the occasional vacation, you know, life things.
He says take a penny now and double it every day for 30 days. Day 2 is a day away from day 1. He is correct….it’s not his math…it’s your reading.
no…. it’s his math. this is a timing issue…. let’s say that you get the penny at 12:01 AM on day 1, then the value at midnight, the END of day one, equals the day 2 BEGINNING value… like wise, end of day 2 equals beginning day 3. So, in his example, he stops with the the end of day 29 figure and loses one full day of compounding for day 30. the $10MM figure is correct.
He should have started at day 0
What I want to know is where someone would get 10,000 pennies?
Makes it hard to trust a guy on financial advice when they can’t do math….
My assumption is that on day one you get the one penny, and it doubles from day 2. The math works either way…with the point being to illustrate the power of compounding.
You are an ass
What u say is true in a way but my dad is a financial advisor and he has told me a lot more and I honestly don’t really agree with u.
What advice could you give that is better than the above example?
…and this Orland, is why you will never have any money
The answer here is wrong, you wont get 5 million dollars, you will get over 10 million
2 to power of 30 is
divided by 100 (a dollar)
The mistake he made is he is only counting the last payment of 5 million and change, he is forgetting about the other 29 payments that were made to you. So you aren’t getting 4 million dollars more than the one time million dollar payment, you are getting almost 10 million more than the million dollar payment.
compounding starts from day 2 and it assumes he is reinvesting all interest re-check your formula as well. I agree you won;t get a return that doubles every day, but the point of this article is to illustrate the power of compounding and has been exaggerated to show effects.
no – he just didn’t start on day 0.
In my youth I would have been tempted to go for the “million dollars” option. But, back then I didn’t understand compound interest. Compound interest can be effective, but it does depend on so many variables, e.g. the rate of inflation, interest rates, the amount saved and over how long. Unfortunately the answer is never black and white.