This is a classic example of explaining the power of compound interest. Before getting into details, I feel I must tell you what compound interest is, and why it's so important?
Source: https://classictvandmovies.club/2020/04/22/penny-to-a-million/
Albert Einstein once said (Reportedly), “Compound interest is the eighth wonder of the world, He who understands it, earns it. He who doesn't pay it.”
To put it simple, it's the money that your money has already made, and now you are making more money from all of it. So much so that Albert Einstein said you are either paying compound interest or getting it.
The example used in this write-up is about a penny, and if you have a penny today, here is how your compound interest will work.
| Day | Compound Interest | Total (USD) |
|---|---|---|
| 0 | 0% | 0.01 |
| 1 | 100% | 0.02 |
| 2 | 100% | 0.04 |
| 3 | 100% | 0.08 |
| 4 | 100% | 0.16 |
| 5 | 100% | 0.32 |
| 6 | 100% | 0.64 |
| 7 | 100% | 1.28 |
| 8 | 100% | 2.56 |
| 9 | 100% | 5.12 |
| 10 | 100% | 10.24 |
| 11 | 100% | 20.48 |
| 12 | 100% | 40.96 |
| 13 | 100% | 81.92 |
| 14 | 100% | 163.84 |
| 15 | 100% | 327.68 |
| 16 | 100% | 655.36 |
| 17 | 100% | 1310.72 |
| 18 | 100% | 2621.44 |
| 19 | 100% | 5242.88 |
| 20 | 100% | 10485.76 |
| 21 | 100% | 20,971.52 |
| 22 | 100% | 41,943.04 |
| 23 | 100% | 83,886.08 |
| 24 | 100% | 167,772.16 |
| 25 | 100% | 335,544.32 |
| 26 | 100% | 671,088.64 |
| 27 | 100% | 1,342,177.28 |
| 28 | 100% | 2,684,354.56 |
| 29 | 100% | 5,368,709.12 |
By the end of the month, with just 1 penny, if you can double it every day for a month, you have over $5 million.
Although it's quite impossible to gain 100% every day, this is just an example to help you understand how powerful is compound growth/interest. So, let's change our calculations a bit, to make them more realistic.
Let's say, we invest consistently, let's say $100 every month, over a period of time, and we also compound our growth at 10%. 10% is not really too much and SPY ETF can alone give you this much over the long run.
| Year | Compound Interest | Total (USD) |
|---|---|---|
| 0 | 0% | $1200 |
| 1 | 10% | $1,320 + $1,200 |
| 2 | 10% | $2,772 + $1,200 |
| 3 | 10% | $4,369.2 + $1,200 |
| 4 | 10% | $6,126.12 + $1200 |
| 5 | 10% | $80,58.73 + $1200 |
| 6 | 10% | $10,184.60 + $1200 |
| 7 | 10% | $12,523.07 + $1200 |
| 8 | 10% | $15,095.37 + $1200 |
| 9 | 10% | $17,924.91 + $1200 |
| 10 | 10% | $21,037.41 + $1200 |
| 11 | 10% | $24,461.15 + $1200 |
| 12 | 10% | $28,227.25 + $1200 |
| .. | .. | .. |
| 20 | 10% | $75603 + $1200 |
| .. | .. | .. |
| 25 | 10% | $129,818 + $1200 |
| .. | .. | .. |
| 30 | 10% | $217,132 + $1200 |
| .. | .. | .. |
| 40 | 10% | $584,222 |
A consistent saving of $180/month at a compound annual gain of 10%, will give you $1 Million.
Takeaway:
Invest consistently, do not look back, the first years are the toughest ones, the gains look low, but the last half of the overall tenure is where you make real money!
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