Would you want to receive a penny doubled for 30 days, or $1 million now? This is an interesting question that shows the power of compounding.
A couple of weeks back, I was having a discussion with some of my friends. They asked me whether I would want to have $1 million now or a penny doubled for 30 days.
It was obvious that it was a trick question of some sort, but I didn’t realize how profound the effects of a penny doubling for 30 days actually were.
When I later calculated exactly how much a penny doubled for 30 days actually was mind was blown. I was sure that something wasn’t quite right.
It turned out, it was right.
What Happens If You Double A Penny For 30 Days?
When you double a penny for 30 days, you will end up with over $5 MILLION, $5,368,709.12 to be exact. This perfectly demonstrates the power of compounding returns that you will get overtime.
This is how it looks:
Day 1: $0.01
Day 2: $0.02
Day 3: $0.04
Day 4: $0.08
Day 5: $0.16
Day 6: $0.32
Day 7: $0.64
Day 8: $1.28
Day 9: $2.56
Day 10: $5.12
Day 11: $10.24
Day 12: $20.48
Day 13: $40.96
Day 14: $81.92
Day 15: $163.84
Day 16: $327.68
Day 17: $655.36
Day 18: $1,310.72
Day 19: $2,621.44
Day 20: $5,242.88
Day 21: $10,485.76
Day 22: $20,971.52
Day 23: $41,943.04
Day 24: $83,886.08
Day 25: $167,772.16
Day 26: $335,544.32
Day 27: $671,088.64
Day 28: $1,342,177.28
Day 29: $2,684,354.56
Day 30: $5,368,709.12
It’s crazy to see that difference you get when you choose for the penny doubles every day for 30 days.
Let’s make it visual:
Don’t tell me I’m the only one getting excited about this?! This is amazing!
Give me a penny, double it for 30 days and I can retire myself, my parents, and my partner! I’ll keep dreaming about that.
The Compounding Effect
When you’re investing your money in the stock market, over time your money will compound. That means that your returns are starting to earn returns.
The compounding effect is why a penny doubled for 30 days is over $5 million. That illustrates that if you invest your money early on, you will have a great retirement.
The compound effect is the reason most of us (including me) are able to retire.
As a wise man once said:
‘Compound interest is the eighth wonder of the world. He who understands it, earns it, he who doesn’t, pays it’ – Albert Einstein.
That is the reason why saving is so important. When you save more money, you will be able to grow it in the next couple of decades. Saving more money can be done by living on half your income, or by making more money.
It can take a while before you see any effect, which can make the process long. If you make frugal living fun and come up with fun things to do without money, this process becomes much easier for you.
Focus on your end goal and anything that you will do along the way will be worth your while!
The Rule Of 72
If a penny doubling for 30 days is a little above your head, here is something else that lets you understand how powerful compound interest is.
In real life, your money isn’t double every day. Sorry to crush your dreams! With the rule of 72, you can calculate exactly how long it will take for your money to double.
It’s pretty simple, divide 72 by your annual rate of return and you will know how long it will take for your investment to double.
72 / annual return = years to double your money.
If I invest $10,000 today and earn 7% the average annual return, my money would be worth double ($20,000) in 10.2 years.
The exciting thing is when you realize that while it takes 10.2 years to double your money, it will take 16.3 years to triple your money or 20.6 years to quadruple your money.
Do you want to maximize return? See what’s the best to invest in Large Cap, Mid Cap, or Small Cap stocks.
Investing Early Is Key
When we double a penny for 30 days, it takes 20 days to get to $5,000. After that, it shoots up to over $5 million.
That means it takes time to grow wealth. If you start early with investing money letting it grow over time, you will have the most benefit from it.
Start investing early is key to this. If you would have missed the first five days of the penny doubling, you would not end up with over $5 million but with $167,000.
The magical penny shows that small amounts add up. Don’t underestimate that. Yes, starting with a small amount of money is better than not starting. You can always increase that over time.
Fun fact: if you flip the penny 1000 times, you will end up with a 50/50 division between heads and tails. That’s called ergodicity.
How Do I Start Investing?
When you want to start investing, know that you don’t need to pick individual stocks. While some people are very successful in that, it does take some knowledge and a lot of time. You take a lot more risk investing in 1 stock than investing in an index that tracks several hundred or thousand companies.
Plus, when you’re investing in active managed (mutual) funds, only 6% of the funds outperform the market over a 15-year period. In addition to that, they’re taking 1-2% of your profits.
Passively managed funds, or low-cost index funds, only take 0.2-0.3% of your profits. They track a certain index, making sure you get the average profits of 7%. Plus, no need to worry about diversification, since you can have a LOT of companies in your index fund. Read more about low-cost index funds here.
Popular index funds include: VTSAX, VBMFX, VIG, FSMAX, VWRL, and many many more. This is no investment advice, please do your own research before investing in any of these funds.
How can I start investing? Check out these resources:
- Vanguard – One of the biggest investment companies and a great place to buy your index funds.
- DEGIRO – A low-cost European broker that I’m personally using.
- M1Finance – This is a US-based company that allows you to build your own stock portfolio, completely for free. No fees involved!
- Acorns – Helps you to invest your spare change and start small with investing.
All In All
When you’re doubling a penny for 30 days, who knew you would get over $5 million. While I’m still a little blow away by it, it does motivate.
Now you know that even if you’re not investing huge sums of money, any investment contribution you make will have significant effects over time.
You can always start investing today and increase the amounts over time. When you’re investing a penny and patiently waiting for it to double overtime, you now know the profound effects.
After reading this, would you want a penny doubled for 30 days or $1 million?