Have you ever thought about what would happen if you doubled a penny everyday for 30 days?
It may seem to be an unlikely experiment, but somehow it shows the effectiveness of compound interest and exponential growth.
Throughout this article, we are going to look at the outcomes of this particular experiment and explain how we can apply the same principle to long-term investing.
The Power of Compound Growth
Compound growth refers to the exponential increase in value that occurs when an asset or investment provides returns, which are subsequently reinvested to generate even more returns.
This is different from arithmetic growth, also known as linear growth, which refers to a quantity that steadily increases over time by a fixed amount.
To illustrate this, imagine 2 people start with a $100 investment which grows 20% annually. Person A pockets the returns each year and only reinvests the $100 principal, while person B reinvests both the $100 principal and any accumulated interest he earns.
After 20 years, person A will have grown his $100 investment to $500, having earned a fixed return of $20 each year ($100 x 20% = $20). This is what linear growth looks like.
Person B, on the other hand, will have grown his $100 investment to $3833.76, having earned 20% on both the $100 principal and any accumulated interest along the way. In other words, he has been earning interest on interest. This is the key driving force behind compound growth.
The table and chart below show how both of these investments would have developed over a 20 year period.
As you can see, both investments follow similar trajectories for the first few years. However, as time passes, the compounded investment diverges further and further away from the linear investment.
This is because your pot of money becomes larger each year when you compound returns, causing your initial investment to grow exponentially over time.
All of this illustrates an important point about the power of compounding. That is, the longer you leave your investment, the greater it can potentially gain. Therefore, we should all seek to begin investing money earlier and allow the investment to grow over an extended period.
A Penny Doubled Everyday for 30 Days
To see the power of compounding in action, let me run you through a hypothetical experiment.
In particular, imagine we had a penny that doubled in value every day for 30 days.
In other words, we start with a penny on day 1. On day 2, our penny doubles to 2 cents. The next day our 2 cents doubles to 4 cents, 8 cents the next day, and so on.
How much would it be worth at the end of it?
By the experiment’s thirtieth day, we have an astounding $5,368,709.12!, which is a huge amount of money from a penny.
As you can see, the total amount grows exponentially with compound interest each day, and at the end of the 30 days, the penny increased by more than 500 million times its initial value.
It’s interesting to note how most of the gains come right at the end. In fact, it took 28 days for our magic penny to reach a million dollars. 2 days later, it was worth more than $5 million!
This scenario illustrates the importance of investing early and letting investments grow over time.
How Much is a Penny Doubled Everyday for a Year?
In the previous section, we saw that in just thirty days, the worth of our penny soared from one cent to more than a whopping five million dollars.
But, that was just for 30 days, right?
What about a penny doubling every day for a year?
Well, hold on to your hat, because it would increase to a gargantuan $37,576,681,324,381,300,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000!
Envisioning your money, a penny that doubles every day for a year is like witnessing a tiny seed develop into a massive oak tree. Or one grain of rice into a sack.
That penny would have bloomed into a huge amount by the end of the year. It shows that if you start investing early, you can reap the benefits of compound interest!
Can You Double a Penny Everyday in the Real World?
Now, I’m sure you’re wondering if this possible in the real world.
Surely this is too good to be true.
The thing is, while doubling a penny every day for a year is a fascinating mathematical experiment, unfortunately it is not feasible in real life.
Here’s why…
Some obstacles will greatly affect this activity, namely;
- Inflation reduces the purchasing power of money over time.
- Trading restrictions limit the number of funds you can invest, as well as the frequency with which you can invest.
- Fees & taxes reduce your overall ROI.
- Market Fluctuations make it near enough impossible to double your returns every day
The Rule of 72
There is a simple, yet powerful financial concept that can help us estimate the time required to double an investment. And it is called “The Rule of 72”.
So how does it work?
Essentially, by dividing the number 72 by your expected rate of return, you get the estimated time required to double your investment.
For instance, suppose you invest $10,000 and expect to earn a 6% compounded return.
Simply divide 72 by 6, and you arrive at the number 12.
In other words, if you compound at 6% a year, it will take you about 12 years to double your $10,000 investment to $20,000.
Understand, that the Rule of 72 is only a tool and it is crucial to take other considerations into account when developing an effective investment plan.
Stock Market
While doubling your money everyday is obviously unrealistic, there are still some great ways to achieve compound growth.
In fact, it is proven that the stock market is one of the best ways to compound your wealth over time.
Why?
Well, firstly it has outperformed other asset classes such as bonds or real estate over time.
To put some numbers on this, historically, the US stock market has offered an annual return of roughly 10%.
According to the rule of 72, it would take around 7.5 years to double your investment with this return.
This includes the reinvestment of any dividends, which as we established earlier, can have a significant impact on your long-term returns.
That’s the beauty of investing in stocks; you have the capacity to earn returns on both your initial investments and any future gains.
This results in an exponential accumulation of wealth over time.
In summary, investing in the stock market can be a superb method to build wealth over time. However, it is also crucial to keep in mind that the stock market requires a long-term perspective, patience, and discipline.
Importance of Investing Early
Investing early is critical to long-term financial success.
Early investing delivers compounding benefits, aids in the achievement of financial goals, gives higher returns, decreases investment risk, and fosters the development of healthy financial habits.
Essentially, by making the decision to invest early, you can benefit from compounding for an extended period of time.
Another benefit of investing early is your ability to take on more risk, since the younger you are, the longer you have to recover from any setback. In other words, it gives you more time to endure market fluctuations, which also helps you obtain valuable market experience, and establish a discipline that you can use to make it easier to take riskier decisions with a potentially larger return.
On the other hand, waiting to invest can have a negative impact on your capability to build up your wealth over time.
Every single year that you don’t invest is a missed opportunity for reaping the benefits of compounding, which could have a big impact on your long-term investment return.
Key Takeaway
- Compound growth relates to the exponential increase in investment value that occurs when gains are earned and then reinvested to generate more gains.
- The power of compounding has the potential to significantly increase your wealth over time.
- Investing early and allowing investments to increase over time can dramatically increase an investment’s value.
- The Rule of 72 is a straightforward approach yet an important financial idea that helps in forecasting when an investment should double its value.
FAQs
How Much is 1 Penny a Day Doubled for 30 Days?
If you double 1 penny every day for 30 days, the total will be: $5,368,709.12
How Much is a Penny Doubled Everyday for 31 Days?
And if you have a penny doubled every day for 31 days, the total sum would be $10,737,418.24
How Much is 1 Penny a Day Doubled for 365 Days?
The amount of 1 penny that doubles every day for 365 days are $37,576,681,324,381,300,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000,000