Last week I came across two very interesting articles, both surrounding the power of compounding.
- The first was by Broke Millennial titled “An Impassioned Plea for Understanding Compound Interest” and it was a great refresher on how the math works behind it all. (As well as how simple the basic foundations of growing wealth is!)
- The second article, which I just recently stumbled across, was by Barbara Friedberg who wrote about why you should start investing NOW over at Good Financial Cents. And that’s the one that REALLY got my head spinning…
I know the power of compounding interest just as much as the next guy, but there was a calculation Barbara ran in her article that immediately stopped me in my tracks and raised the “doubt” flag.
She said that if you doubled a penny for an entire month, you’d have over $10 Million dollars by the end of day #31.
COME ON! No way???
At first I wrote it off as a mistake (maybe she meant 10 Million pennies? Or, more than likely, 1 Million pennies?) but by the time I finished the article, I still couldn’t shake her statement. My curiosity got the best of me, and I decided to run the numbers myself.
I opened up a fresh Excel spreadsheet, plugged in a quick calculation (“above cell x 2” copied down 30 lines), and hit enter.
Here’s what it showed:
By day #18 the doubling penny is now worth $1,301.72. By day #28 we’re well over a million dollars at $1,342,177.28. And by day #31 – as promised – we’ve crossed the $10 Million mark at a staggering $10,737,418.23.
Hot.
Damn.
That’s the power of compounding folks.
So how do you apply this to “real” life? (And, more importantly – to our OWN finances so they can double to millions of dollars over our lives?) Easily. By doing two things:
- INVESTING your money Right. Now.
- Letting it ride for years and years and years and years (perhaps 31 of them? :))
As Barbara mentions in her article, we’ll be hard pressed to find 100% returns every day, month, or year invested, but as the dates tick on you’ll certainly find your monies growing quite healthily. It just takes time for the compounding to do it’s thing. Well, that and the initial investments of course.
So any time you doubt the power of compounding going forward, do yourself a favor and think of these little magical pennies here. In fact, do yourself one better and print off that image there to tape to your computer! That way every time you open up Amazon you’ll be reminded how much you’re really spending.
(I’m off to go raid all my penny jars now…)
—–
PS: Don’t click that Amazon link.
[Awesome photo of toned pennies by Mark Turnauckas]
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The last time you told me not to click on something I didn’t, nobody believed me, and I forgot about it after a couple of days….
This time, I remembered the last time and figured I’d click it so I wouldn’t forget and because nobody but Google and the NSA would know. And I regretted it immediately.
The answer to the question on the Amazon page is “No they don’t. What’s under them does.”
I can’t believe you hadn’t heard of the double a penny thing! It’s such a frustrating calculation! So simple. And it seems SO doable, particularly through the first week or so. :)
Haha… I’m proud of you for not listening to me this time around :) You should go back to that older one now and see what you’re missing! Aren’t you curious??
Totally curious. Just need to remember which one it was now… that’ll pass some time on conference calls….
Hey I wanted to know how does it work do I double my pennies each day? could you please me more InSite or more cool details I would really appreciate it
Ditto! I can’t believe the greatest money blogger has never heard about this penny thing. This is something we learned in the 5th grade! Sheesh, J. Money… Where have you been all these years?! Haha
Haha… probably scheming on ways to trade basketball cards! I could have cared less about money until I hit my mid-20’s and smarted up ;)
I never heard of it, and I’m easily in the top 2,000 money bloggers around, in the US… okay Midwest…
What counts is that you’re in the top of our hearts (awwww).
Wow, I’d never heard that. The math is completely crazy. No wonder someone once said that the eighth wonder of the world is compound interest. We are trying very hard to get it working big time in our favor! We didn’t start investing until mid to late 20s though, so we’ve got some catching up to do.
Better late than never, as they say!
I am in my late 40s and feel it is to late to take full advantage of the power of time when investing. If I could just figure out how to get my sons, both in their early 20s, to listen to things like this.
Canada did away with the penny last year. I miss them.
It’s never to late!!! You’ll live until at least 102, right? That’s 60 more years for you to compound them bad boys ;)
As for your kids, just send them a link to this blog, d’uh.
While you are raiding those penny jars go ahead and separate the pre 1982 pennies from everything else. Someday you might be able to melt those down for the copper content. Also maybe you will get lucky and find a nice rarity!
True, but it’s also very illegal :) Not that I’ve ever heard of anyone going to jail for it?? Why don’t you go first and then let us know what happens :)
Hot Dam is right! That is crazy, but proof again of why to start saving/investing as soon as you can regardless of how much it may be in the beginning. Seeing this is exactly why we’re working with our oldest on teaching her the importance of saving.
Holy $hitballs, indeed. I knew compounding interest was incredibly powerful, but this clearly illustrates exactly how intense it really is! This is an excellent visual reminder why we should all be investing our tails off (and starting as soon as possible).
It’s hard for people to grasp this concept because compounding is not typically a linear path like your spreadsheet. When you invest, some days you will be up and some you will be down, but over a period of time there will be growth and it’s important to understand that even though you may not “see” it every day like a trusty spreadsheet, it is happening. :-)
You can change the days to “years” then – that would help smooth it a little :)
I can share an excellent example how time is your friend.
When my daughter was born, I (<– typical parent) wanted save for her college. Not being to smart, I set up my own "529" plan and started purchasing stock in the local electric company via monthly augment to my electric bill. My cost was just $30/mo so I figured it would be simple and safe. At 18, she won a full scholarship so my "529" plan stayed intact. She's now 32 now and the account is worth over $82K. Not a bad investment for a little bit of time.
Oh wow, yeah – no kidding. You can always cash it out and take the hit too if you wanted :) or use for your future grandkids!
Reminds me of one of my all time favorite children’s picture books: One Grain of Rice by Demi (9780590939980). Take a look and read it to J. Baby when he is a little older…maybe that will help convince him to continue down the path you’ve set!
Good idea! Will google now!
I’ll be reviewing this with my 3 children tonight!
As far as Amazon…… http://youtu.be/kY84MRnxVzo
Haha… good one.
This is an awesome article and very motivating. I don’t think people realize how important investing is at a young age. Frankly, I didn’t either. It’s so easy to fall in the trap of wanting things. I fall into it. So, now I have to look at every dollar spent as if I could have invested it instead.
I know – I so wish we listened back when we were younger!! We’d be in such great shape!
The key is just to put your nest egg on black once a year, and get very lucky for thirty one years straight…
Wow, that’s incredible! I’d never have believed it, and it’s a great math lesson for the kiddos, too.
I did not regret clicking on that link.
Haha… good woman.
Great, now I am clicking on an Amazon link…that reverse psychology thing is fantastic! And compound interest is why we opened Roth IRA’s in our early 20’s and why we pay off our mortgages faster than necessary. No reason to let the bank make tons off of us when we can use it elsewhere to build.
I know a lot of people are anti-paying off the mortgage, but I’m more along your path as well… It would be incredible to have $0 debt once and for all. Imagine all the extra money we’d have! That is, if you didn’t stop working as much to enjoy it even MORE :)
I’ve seen that penny calculation before and its a good one to get your head spinning. Too bad there isn’t enough time in life to get 31 doubles, just need to make the few you can get to be worth more by saving NOW!
Thanks for the amazon link… :) Don’t Click This J.Money
Well that’s not fair. You can’t link-trick me back!
I too had seen this projection of penny compounding before, and it reminded me of another classic from my boyhood: “If you could collect a penny from every person in the U.S.A., you’d be a millionaire.” At a projected 2014 U.S. population of 317 million, that would net you $3,170,000. Not exactly chump change either! (Say, buddy, can you spare a penny?;)
You should try it and see what happens :) Perhaps you’ll get as lucky as that guy who asked everyone to send him a dollar back in the day:
http://www.gimmeabuck.com/
The concept of exponential growth is as ancient as civilization itself. It has been said before in the story of the wheat (or rice) and the chessboard:
http://en.wikipedia.org/wiki/Wheat_and_chessboard_problem
Wow, very cool. Hadn’t heard of that one before either!
Nifty arithmeti! This reminds me of the time when I calculated how by investing £5.36 per day and getting 10% return one can make over £7 million in about five years time. Wish I find a way to do it in real life not only on a spreadsheet.
I also think that Amazon 1 click is the most evil inventon since…well, since ever.
What, really???
Can’t you just automate that bitch and sit back and smile?? :)
Great post, all I have to do now is find someone to me that amount of pennies.
All you have to do to save $1M, is a dollar a day, for a million days….
But all money adds up. I pick up pennies on the street, heads or tails up. I had a maintenance guy tell me once that he doesn’t pick up any pennies, it’s not worth it. I replied, “If I had you money, I would skip them too”. Of course, he didn’t really have anything….
I pick up everything off the floor too, to the dismay of my wife who says I’m setting a bad example to my kid (ie don’t pick up trash). I keep saying it’s MONEY! FREE MONEY!, not trash, but no one ever listens :)
Thanks for the mention!
I also saw that article recently and thought, NO FRICKEN WAY! It’s quite the mind-bender that compound interest/ growth is that powerful. Or, as you so aptly put it, “HOLY. $HITBALLS!”
I just had a conversation with a friend recently about why she needs to start investing her $20k+ in savings…this article should help do the trick.
Guess it depends on her reasoning to have $20k in savings… we have $50k and like it perfectly :) (though a good portion of it is just temporary waiting to go into an IRA, but still.)
I used the rule of 72 to calculate when I’ll become a billionaire (meaning your money will double every 7.2 years). With pretty little effort, I’ll become a billionaire around age 101. 101 is old but knowing that I can go from zero to a billionaire with relatively little effort is pretty incredible!
Start investing young enough and life looks pretty sweet!
I wrote an article about the importance of investing NOW. I won’t link it as to not spam the comments section. However, just writing about it may be considering spamming. I hope not..
Haha it’s never spam when it doesn’t come from spammy people ;)
Hi J.,
I was so excited to see my penny compounding example get such clear and informative treatment. As someone who is staring down the barrel of retirement, I can attest to the fact that compound returns “work”. My husband and I have never earned huge salaries yet we managed to save the max every single year since our mid 20’s in workplace retirement accounts. We’ve also added extra savings to our investment brokerage account. After living well beneath our means for decades, it’s awesome to hit our retirement goal years before we expect to retire.
J. this was a great post and I’m so pleased to have helped inspire you.
Hooray! So glad you liked it :) Keep on spilling all your secrets over there! We can never hear enough of them!
That is the greatest motivator ever! It’s a pretty crazy concept but that really takes it over the top but helps visually show us how the compound interest works.
I just started investing…looking forward to my first million!
I hear the first one is the hardest :)
While this calculation is motivating, I feel it’s also unrealistic and deceiving to look at. (If you don’t want your bubble burst, stop reading now). A more realistic approach can be found using one of many savings calculators, like this one from Bankrate.com:
http://www.bankrate.com/calculators/savings/simple-savings-calculator.aspx
An index fund that tracks the S&P 500 would return about 8% in the long run, so you can use that for a good average annual interest rate. Mind you, this is not meant to discourage people from saving and investing. Indeed, invest as much as possible during your working years! But I just think people should have more accurate expectations of what they’ll get for their money. Sorry if I rained on anyone’s parade. ;-)
It’s okay, we’ve come prepared with umbrellas :)
This is a variation of a classic mathematical mind experiment, intended to highlight the problems of anything with exponential growth. The mind experiment goes like this:
Imagine you are sitting in the very top row of an average-sized enclosed football stadium, as far as you can possibly be from the field. It’s 12:00 PM. For the sake of the experiment, assume that the stadium has been made water-tight.
I have an eye dropper, containing a single drop of magic water, which, once released from the dropper, will double in volume once every minute. After one minute, there will be two drops of water. After two minutes, there will be four drops. And so on.
Now, the mind game: How much time do you have to escape the stadium before it is completely filled with water?
The answer is: you have until 12:49. Forty-nine minutes.
And here’s the real problem: At 12:45, when you have less than five minutes to escape, how full is the stadium?
After 45 minutes, with less than five minutes remaining, the stadium is only 7% full. It is still 93% empty. After 45 minutes, the water will have only come up to the field-level seats.
Ans
YIKES!!!!
You’re right – it can def. go in the opposite area too. Especially with debt!
Pretty powerful stuff either way you look at it.
Alright, where am I going to get this 100% every day for a month now ;)
Jk, it’s a cool concept difficult to implement. Definitely like the 31 year scale instead!
Agreed, but it’s more like a 310-year scale. And even then, your counting on 8%+ returns on average for 31 years
I’m counting on 16% returns cuz I’m special :)
#NOT
A really great reminder! I need to start investing and using this power.
But what do you do if in say year 4 or 5 your stash is slashed by 50%?!
Why? Because of stock market stuff? You pick up even MORE on the cheap! :)
I have heard of compounding but I never quite understood it but thats what handy dandy charts are for. I do have a little extra cash but I can think to do with it? Maybe investing is a good idea
Here’s a list of how I prioritize my extra money if it helps :)
https://budgetsaresexy.com/2014/03/what-to-do-extra-money/
I could seriously read about compound interest all day long. The closest I’ve seen is the 1000% return Pier 1 would have given if you had purchased near the bottom of the crash. A $2500 investment would now be worth a cool quarter mil just 5 years later (I just wrote about it, so that’s why it’s in my head). Of course, hindsight is 20/20. The biggest thing is just to invest now and don’t touch it for as long as you can.
Yeah, I saw that post of yours – really enjoyed it!
As a 27-year-old in the UK where is the best place to get started investing into a fund that eventually generates compound interest? Where’s the best place to start as a complete newbie in the UK?
Here’s a directory of a bunch of UK bloggers – I bet you’ll find some good answers there :)
https://directory.rockstarfinance.com/personal-finance-blogs/?category=&age=&sex=&race=&city=&state=&country=United+Kingdom&phase=&profession=&search=
i do trade, and do have a bank account. so when i write myself a check for i am trying to do a 10 grand challenge in savings, and 10 grand in checking, where the checking i will spend and the savings i will try to save. so… i will add the one penny only in the savings. i am doing a biweekly, savings and bi weekly checking. i don’t know if i will make 10 million after 31 years, but time will tell. soon.
The answer is wrong, not 10,737 418. 23 it’s for the day #31 $10,737,418.24 and total for the 31day month is $21,474,836.47 not that hard folk’s
Everyone is so mind blown by this……my mind is blown that nobody has done this math with the cumulative amount!!!
How do I do this?