Investing Advice

Compounding Interest The Magic and Power

Imagine a job offer for work lasting exactly 31 days. You are given the choice of a flat payment of $474,836.47, or a daily wage starting with 1 penny on the first day, and then doubling each day. This would be 2 cents the second day, 4 cents for the third day, and so on through 31 days.

Which would you choose? If you were to take the $474,000, you have just thrown away an incredible $21,000,000 - that's 21 million dollars!

Here is the proof:
 

Day   Pay for day Day Pay for day  
1 .01 17 655.36  
2 .02 18 1,310.72  
3 .04 19 2,621.44  
4  .08 20 5,242.88  
5 .16 21 10,485.76  
6 .32 22 20,971.52  
7 .64 23 41,943.04  
8 1.28 24 83,886.08  
9 2.56 25 167,772.16  
10 5.12 26 335,544.32  
11 10.24 27 671,088.64  
12 20.48 28 1,342,177.28  
13 40.96 29 2,684,354.56  
14 81.92 30 5,368,709.12  
15 163.84 31 10,737,418.24  
16 327.68   $21,474,836.47  total

The reason this works is because within a few days you are no longer doubling pennies, but dollars, then doubling thousands of dollars. Every day you are doubling a bigger and bigger number (doubling your money is called making 100%).

How much you earn because of compounding depends on the percent you make and the amount of time the money grows. Of the two (percent and time), time is the more powerful.

If you bought stock in a company at $20 per share and it went up in value starting at only 28 cents a week (1.4% per week), with compounding you would be making 100% on your investment each year and the stock price each year would be doubling. Then in 31 years, every penny that you had invested in this stock would turn into $10,737,418. Every dollar invested would turn into $1,073,741,824. Yes, really!

Other "Why Invest Money?" Topics:

  1. Investing Introduction for Adults
  2. Special Investing Introduction for Children & Young Adults
  3. Introduction to the Investing Concept of the Golden Piggy Bank
  4. Compounding Interest - The Magic and Power
  5. Basic Investing Words You Need to Know

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