Last Updated on August 12, 2023 by Prakash Kolli
A penny doubled for 30 days doesn’t sound like very much. People don’t see much value in a penny, and some countries like Canada eliminated the coin altogether. But what if you were told that doubling the amount of money you have every day for thirty days, starting with one cent, could make you a multi-millionaire?
It may be hard to believe, but if someone offers a penny doubled every day for thirty days or $1 million immediately, you may make a mistake by accepting the million dollars.
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Double a Penny Each Day for Thirty Days
If you have a penny on day one, then double it the next day and every day after that for thirty days, you may be surprised to see the actual value on day thirty.
The following table shows the value of doubling a penny every day for thirty days.
On day 30, an initial investment of one cent becomes $5,368,709.12 after doubling a penny the next day and every day for thirty days. This is an excellent example of the power of compound interest. It is also a valuable lesson in the benefits of investing.
What is Compound Interest
Albert Einstein defined it best when he said,
Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.– Albert Einstein
Well said, Mr. Einstein. Interest is calculated on the initial investment or principal and any accumulated interest from previous periods. Earning interest this way helps you to grow your savings more quickly, and you can end up with more money than accepting a more significant payment upfront.
Of course, you won’t experience a 50% growth rate in any investment, unlike the example of doubling a penny for 30 days. In fact, the interest rate will probably be in the low single digits. Although it may take more time, compound interest will help grow your wealth even at a lower rate.
The Rule of 72
Although it’s challenging to double your initial investment quickly with today’s interest rate levels, following the Rule of 72 will help you determine how long it will take to get there. The Rule of 72 calculates the number of years it will take to double your initial investment.
Divide 72 by the annual rate of return on investment to see how many years it will take to double it. A simple example is if you have an investment of $10,000 growing at an 8% annual rate of return, it will take nine years to double the investment to $20,000.
Start Investing Early
The initial investment of a penny in this example leads to phenomenal growth thanks to compound interest. It’s essential to start investing early. The example from the Rule of 72 shows that it takes at least 9 years to double the initial investment, but that is only if you have an annual return rate of 8%. Growing your savings will require more time and patience, especially when you first start investing.
So the earlier you start, the easier it will be to grow your wealth. The growth will accelerate as the capital accumulates. Before you know it, a single penny will be worth $5,360,709.12.
How Do I Begin Investing?
There are several investment vehicles you can consider when you start investing. You can work with a financial advisor to discuss your financial goals and determine the right investment strategy for you.
Your portfolio can contain a mix of actively and passively managed funds, such as individual stocks, mutual funds, index funds, and ETFs (exchange-traded funds). Your investments will depend on your timeline, risk tolerance, and financial goals.
Investments that are actively managed by a financial advisor also require paying a management fee. Index funds that mimic the market are passively managed and have little to no commission fees. Index funds also offer diversification and low or moderate risk, depending on the sector and type of index fund. On the other hand, investing in individual stocks can be a high-risk investment. The father of index funds, John Bogle said,
“The index fund is a practical, cost-effective way to achieve the market’s rate of return with little work and price. Individual stocks, market sectors, and management selection are all removed from index funds, leaving simply stock market risk.”
Do your research and determine whether you want to work with an advisor or open a low-cost brokerage account. Either way, start investing as soon as possible to grow your savings.
The Key Takeaway
Suppose you are ever in the fortunate position to be offered $1 million today or a penny doubled for 30 days. This information should make you think twice about taking the more significant payout upfront. It is undoubtedly an exercise in patience to watch your money grow over time. However, starting investing early is essential to reach your financial goals and to grow your wealth. Investing early can help you retire comfortably and live a life of financial security.
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Nadia Tahir is a freelance writer and content creator. She mostly writes in the areas of lifestyle and personal finance. She also enjoys writing on her blog about motherhood at This Mom is On Fire.