This Simple Concept Changed My Mind About Saving Money
What would you say if I told you that $0.01 could turn into over $10 million in just one month? Would you think I was crazy? Would you think I was terrible at math? Well, before you head over to the “x” button in your browser, hear me out. I’m not lying at all. I’m going to show you what simple concept has changed my mind about saving and investing my money. I’m going to show you what compound interest is all about. Some have called it the eighth wonder of the world. I would consider it as well after doing the simple math around it. Compound interest really does rock my socks off!
Turn $0.01 into $10 Million!
When I first heard about turning $0.01 into over $10 million in just one month, I thought it was crazy. My head was spinning just trying to figure it out. The math didn’t work in my head. Now, I heard about this trick a long time ago, but never talked about it on this site. I’ve spoken about compound interest before, which is why investing and saving is so worth while. It’s really the only way I will be able to retire. It’s the only way for most people. Compound interest is helping me retire people!Would you take $1,000 per day for a month or $0.01 doubled every day for a month? Click To Tweet
It wasn’t until I actually put this little math conundrum down on paper (OK, it was Excel) that I truly see how it works. Here is the background. If you could double $0.01 every day for one month, what would you get? You’re probably thinking just like me and saying “not much!” It’s hard to comprehend this little equation. I noticed another site some time ago ask if you would rather take $1,000 each day for one month or double $0.01 everyday for one month. Most people would take the $1,000 per day! That sounds like a lot of money and it is for most. At the end of one month, you would have $31,000! That’s not pocket change!! Want to guess what you would have if you double $0.01 everyday for one month? Let me break it down…
Do you see that up there? Yes, $10.7 million when you take $0.01 and double it everyday for a month. Wow, that’s the real power of compounding interest. This is the same thing that powers investments and savings in general. Now, let me speak some truth first. This little math trick is to just show you the real power behind compound interest. You won’t find any investment or savings account that provides you with 100% returns. That would be unrealistic and you shouldn’t focus on that. It just won’t happen!
Related: Start investing today with Betterment for as low as $25!
I show you this because I know and speak with people regularly who don’t understand compound interest. They don’t think investing is for them or don’t have time to start. I get a little cringe in my neck every time I hear it. I get that cringe because I used to be that way. “I’ll save tomorrow” was a statement that came out of my mouth on a regular basis. The same thing goes with investing. I didn’t know how to do it and it sounded like something only the one percent could do. Well, I was wrong folks. I was way wrong!
Let’s Check Out Some Real Numbers
OK, I know the math up there looks great and you might be irritated that this isn’t some get rich quick scheme. As noted, I put this together to show you how compound interest really works. It’s how investments gain value over time and how people can retire with money in the bank.
To show you some real numbers might make this a little more real for you. Let’s start with $100. You can start a Betterment account for $100 (actually less) and start investing with a long-term strategy in minutes. You could also try Wealthfront, where you’ll have no fee for up to $15,000 when you use my link.
If you were to invest starting with $100 and you contribute $100 to your investment account per month, how much do you think you’d have after 20 years? Seems like a long time, doesn’t it? Remember, investing and compound interest work best over the long run, so it’s not a short-term game to play.
What if I told you, with those numbers, you’d have saved $57,732 by just starting with $100 and adding $1,200 per year. That is very doable for most people.
The graph gives you a little visual break down on how this works, but the 8% rate of return is very doable. In fact, over the last 30 years, the S&P 500 has averaged a 10.7% return. Yes there are ups and downs, but that’s why we invest for the long run. So, when people say you can’t get 8% returns, it’s just not true. Tell them to look at historical averages of what has already happened.
Here is the amortization break down for you for each year and how much interest you receive. As your balance increases, so does the interest you earn.
Not bad for just $100 starting out and $1,200 per year. Who wouldn’t want to earn $33,632 in interest over 20 years? Without compound interest, many of your saved money will do nothing. If you don’t invest it, it won’t go anywhere and it won’t beat inflation. Just remember that.
What if we bumped up the monthly contribution to just $150? How will that change the equation?
And just like that, with an extra $50 per month ($600 per year), you could have over $86,000 in your account with the same rate of return and only starting with $100. That’s quite a nice leap there. In this equation, you’re earning over $50,000 in interest alone. I’ll take that any day!
You can try this calculator as well…
Simple Savings Calculator
The simple savings calculator calculates future savings from investments.
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Everyone Should Save and Invest
I say this because I mean it. I think everyone should save and invest. It doesn’t matter how much money you make, there is always a little something you can put aside. Don’t think so? Well, take a deep look into your expenses as you might be over paying for a service or buying stuff you don’t actually need. Too many people live paycheck to paycheck and don’t know how to get out. You get out with will power, smart money management, and using the power of compound interest to your advantage. Help your money make money for you. That’s what everyone should do!
Related: I manage all my finances with a free Personal Capital account. It’s the best thing since sliced bread!
If you still think you can’t save, then try the service called Digit. This free service will analyze your spending and pull money into a savings account based on said spending. It’s pretty cool and changed the way I save money. While you don’t earn any interest with it, it will show you how to start saving. If you do use it, you can then transfer money you start saving into an investment account or an interest-bearing savings account. They have started a new “Digit Plus” account, which is still free, but gives you a bonus ($0.05 per $100) for money you keep in your account for three months.
I recommend Betterment for beginner investors and Capital One 360 for savings. If you’re more advanced, then check out TradeKing, Scottrade, or even Motif Investing (based on themes/industries) or these other great online brokerages, who have low fees!
While you can’t expect earning a hot 100% return, investing is how I’m charging ahead toward retirement. The S&P 500 has averaged around 8% annual return for the last 30 years. While there are some ups and downs (that’s normal), the average return is 8%. You can’t get that in a savings account. It won’t happen these days. If you never started investing, then you can learn more here. I would recommend starting with a retirement account, such as a Roth IRA. Retirement is important and investing is how you get there! Just imagine earning 8% on your money every year for the next 30 years. That can be empowering! That’s compound interest my friends!
Well, there you have it. That’s how you can turn one penny into over $10 million in a month. It’s the power of compound interest and I love it! Sometimes it’s hard to comprehend something we don’t truly understand. Most people, including myself would say this is impossible and it doesn’t work, but the Excel sheet up there says otherwise. I wasn’t a believer for a long time. I didn’t really care about anything but my bank account balance. I was foolish and shortsighted. I didn’t long term. I was just focused on now. I’m lucky enough to have figured it out in my twenties. Others may not be so lucky, but it’s never too late to start stashing away money for retirement. Trust me, it’s never too late!
What do you think about this little math problem? Did you think it was possible?