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The Value of Compounding

One of my favorite questions is: If you had a job for 30 days and could choose to either be paid $1000 every day or a penny the first day, doubled every day after, which would you choose?

Take a second. Think about it. I think this will help you make up your mind. If you calculate a penny a day doubled for 30 days it grows to over $10 million dollars. I know what I’d pick!

A penny doubling every day illustrates the principal of compounding. The bigger the beginning number, and the bigger the percentage at which it is compounded, the larger the final outcome. Take for example, the purchase of Manhattan in 1626. Peter Minuit paid local Indians a load of cloth, beads, hatchets, and other odds and ends worth 60 Dutch guilders. This was equivalent to $24. Sounds like the Indians were taken, right?

Yet, if those Indians had invested their $24 at a 7 percent interest rate, today it would be worth $4.9 trillion. Every city block of Manhattan would be worth $644 million. And, that is just for the land. It doesn’t include what’s built on it. Imagine if the Indians had invested at 10 percent. Their $24 would be worth $207 quadrillion now.

Are you thinking to yourself: “But, that would take over 300 years. I don’t have 300 years!” I couldn’t agree more. Do you have 25 years? If you invested $100 thousand at 5 percent for 25 years, it would grow a little over three fold. If you invested it at 10 percent, it would grow almost 10 fold. That’s $985 thousand!

 

For more information on all of these topics, I encourage you to listen to About Money, a weekly podcast and radio show. You can also follow us on Facebook and Twitter for blog updates, podcast news, and more!

I want to hear your opinions; please leave a comment below and let me know your thoughts.

 

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