Here’s a question for you.
If I gave you a choice between receiving $1,000,000 today, or receiving a penny today, two pennies tomorrow, four pennies the next day, and so on for the next 30 days…
…which option would you take?
Before you let me know your answer, think about this. Legend has it that there was once a king and a mathematician. The mathematician invented chess as a gift to his king. The only price he asked was one grain of rice for the first square of the chessboard, two grains on the second square and so on.
To the king’s surprise, this would be a heap of rice larger than Mount Everest, or 1,000 times the 2010 worldwide production of rice!
If you’ve been struggling to grow your wealth, you’ve probably been underestimating the power of exponential growth and how it relates to compound interest.
Let’s go back to the original question. A lump sum of one million dollars, or a penny doubled every day for 30 days? By now, you’d probably guess the penny doubled will yield more money, and you’d be right. By day 30, the penny will have grown to $5,368,709.12.
Of course, the money in your bank account isn’t going to double every day. However, because compound interest employs the exact same exponential growth principle, you can work out how long it will take to double.
USE THE RULE OF 72 TO DOUBLE YOUR MONEY
There are some fairly intimidating mathematical formulas to calculate compound interest, but it’s surprisingly simple to calculate a rough estimate of how long it will take for the money in your account to double.
72 ÷ Interest Rate Per Annum = Number of Years to Double Your Money
For example, if your interest rate per annum is 10%, it’s going to take you 72 ÷ 10 = 7.2 years for the power of compound interest to double your money. After 14 years, it’ll have doubled again, and after 21 years, it’ll have doubled a third time.
THE SECRET WEAPON IS TIME
How can you start to have compound interest working in your favor? The answer, again, is simpler than you think.
Using the rule of 72, and assuming you start investing with $10,000, then you’ll have $20,000 after 7 years, $40,000 after 14 years and $80,000 after 21 years.
In other words, if you and your friend both start with $10,000, then your savings can eclipse your friend’s savings by a margin of $40,000 – simply by starting 7 years earlier than your friend.
WHAT CAN I DO TODAY?
While you can’t wind back the clock, there’s still plenty you can do to become a champion of compound interest. For a start, credit card companies typically charge 20% monthly interest on unpaid balances. That interest is going to compound faster than you’d probably guess, so pay off your credit card debt as quickly as possible, or at least transfer it to the lowest interest rate you can access.
Secondly, find a high interest savings account to deposit your money into. Bankaholic is a popular website that provides bank account comparison information for U.S. investors.
Thirdly, and possibly the most powerful tip of all, is that compound interest applies not only to savings accounts. If you own stocks that pay dividends, you can and should reinvest your dividends to buy more shares of that stock. This way, you take advantage of the same compound interest principle in an investment with a typically higher rate of return. Some bonds also pay compound interest.
Finally, consult and associate with those who have been doing this longer than you. The MOBE Platinum Mastermind is where the most experienced mentors in investing and asset protection share their investment methods with fellow members. To learn more about the Platinum Mastermind, click HERE.