How to save millions with compound interest

Have you heard about the magic penny before? What about turning one little penny into over $10 million? No?

Well, before we go on to talk about this magical penny, let me ask you a simple question and I want you to answer it honestly.

Would you rather have $1 million or one penny doubled every day for 31 days?

I’m going to bet that 95% of you are going to pick the million dollars. Heck, that’s quite tempting isn’t it. To have one million dollars in cash just sitting there waiting for you. Oh, it gives me goosebumps.

The other 5% of you would pick the penny doubled and I applaud you. Why?

Because it’s the right answer. You’re thinking with a long-term view over the the immediate gratification view. I used to be a part of the 95%, but I’ve since changed my thought processes ever since I got out of consumer debt.

Some of you are probably shaking your head thinking that a penny is worthless. I think someone called it a pocket weight at one point in time. I hate getting and carrying around pennies, but if I can get one to double in value per day for 31 days, then I’d love me some pennies.

Before you head over to the “x” button in your browser, let me show you some simple math that makes the penny so enticing. I’m going to show you the simple concept that 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!

How One Penny Turns 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!

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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!

I just upped the money to $1 million to make it even more enticing. More people would take that $1 million and run with it. It’s just too tempting and it’s an amount most people couldn’t fathom having in their possession. A few years ago, I would’ve done the same thing.

Want to guess what you would have if you double $0.01 everyday for one month?  Let me break it down…

example of compound interest

 

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!

This little math lesson isn’t to get your hopes up, it’s to get you to understand that holding money for a long period of time can reap great rewards. Too many of us are focused on instant gratification, but if you’ve never talked to a lottery winner, then you’d might not know that it usually ends in failure.

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. I’ve been with them since 2012.

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 save $57,732 by just starting with $100 and adding $1,200 per year. That is very doable for most people.

Compound interest graph

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.

Compound interest amortization

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, much 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? Just another $50 per month. How will that change the equation?

Updated compound interest graph

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!

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!

I know many of you think it can be hard to save money, but usually priorities are mixed up when that comes into play. Too many focus on wants over needs. Instant gratification drives our purchase decisions because we can’t think of the long term. We want it now and don’t want to wait. Maybe we can blame Amazon for that!

I recommend Betterment for beginner investors because I know and use it. If you’re more advanced, then check out TradeKing, Scottrade, or Vanguard.

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 10% annual return for the last 30 years. While there are some ups and downs (that’s normal), the average return is 10%. 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 10% on your money every year for the next 30 years. That can be empowering! That’s compound interest my friends!

If you’ve never invested before or aren’t sure how to do it, that’s OK. We have you covered for all age groups. Just pick where you fit and see how easy it really is…

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?

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