A childhood lesson on the value of compounding, or a penny doubled every day for 30 days grows to HOW MUCH??
When I was young, I asked my older brother to do my chores. (To this day I hate washing the car, because that was my job every Saturday). Even at 10 years old, he was a savvy investor. My smart-alec sibling said he would do it if I paid him. In fact, he said that I could pay him over 30 days, and I could start with a penny.
“What I want you to do,” he said, “is put a penny in my piggy bank today. Tomorrow, put two pennies in. The next day, four pennies. And double the number of pennies each day for a month. After 30 days, you’re done.”
Of course, I agreed! How much could that add up to? Maybe a couple of dollars?
He laughed and said you’re going to make me a millionaire. I looked at him quizzically. “Huh?” So he took out a piece of paper—yes, this was in the dark days before laptops and spreadsheets—and started doubling a penny 30 times. Do you have any idea what that totaled up to?
You can see from the chart below that I’d already reached my estimated $2 in just 9 days. And my brother became a “millionaire” in this fantasy scenario on the 28th day. However, look at the difference another 2 “days” made. You see, it’s only in those last few days that the doubling–or compounding–has its biggest impact.
This is a totally unrealistic scenario, as there’s no investment with a 100% percent return on investment (ROI) each day for a month. However, it does illustrate the concept of compounding and the value of starting early. In this fantasy example, those last 7 “days” gave that penny time to grow from $41,943 to over $5 million.
Let’s use another illustration—the one offered by the Internal Revenue Service (IRS) in its Publication “Lots of Benefits” about employee retirement savings plans.
In the example provided by the IRS, you have two young workers, April and June. Each started working at age 20.
April immediately began participating in her employer’s retirement plan. Her diversified portfolio of investments provided, on average, a return of 10% per year. (This return is not a reflection of actual investments and is only used in the IRS example.)
After 10 years, April married, started a family and decided to stay home and raise her children. She had contributed $36,000 to her retirement plan over 10 years while working. She did not contribute another penny after she quit her job. After 45 years, at age 65, April had accumulated over two million dollars.
Conversely, June waits ten years and starts saving for retirement when she’s 30. Even assuming the same 10% average annual return from a diversified portfolio, she will have to contribute $300 per month for over 30 years to earn a million dollars by the time she retires at 65 years old. That’s half the amount earned on 3.5 times the investment. Her money simply didn’t have enough time to grow and compound.
See? It really does pay to start early, doesn’t it?
If you’d like to encourage your employees to start saving for retirement, there are a number of different plans you can offer. To discuss your options, speak with one of the retirement specialists at CorPay Retirement Services.
Actify Investor Retirements, LLC dba CorPay Retirement Services. Investment advisory services provided by Actify Investor Retirements, LLC. Actify Investor Retirements, LLC is a Registered Investment Advisor. Information presented is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein.