Imagine this: a rich and eccentric old man has just approached you with a job opportunity. He needs someone to watch his mansion for the next 30 days while he’s out of town. All you’ll have to do is come by each day and make sure the gate is locked and hasn’t been tampered with. The old man’s house is his most prized possession, so he is willing to pay you a large fee to do this job. He gives you two options to choose from for payment.
Payment Option #1
For each day he is gone he will deposit $25,000 into your personal account. That’s twenty-five thousand dollars each and every day for 30 days!
Payment Option #2
On day 1 he will pay you $0.01. Each of the following days he will double what he's paid you so far. So on day 2, you would be paid another $0.01 in order to double your total to $0.02. On day 3 you’d be paid $0.02, again doubling your total from the previous day (i.e. $0.02) to $0.04. On day 4 your payment would be $0.04, bringing your total to $0.08 (i.e. double day 3's total). This pattern would continue each day for 30 days.
Which option should you choose?
An Obvious Choice...
Is there anyone who would trade $25,000 per day for a few pennies? Using simple math, we can see that $25,000 per day for 30 days would result in a whopping $750,000 payday (i.e. $25,000 x 30 days)! That’s a potentially life-changing amount of money. The answer on which option to choose is pretty obvious, right?
Not so fast. There’s a concept that affects this scenario that we must examine before making our choice. That concept is compound growth. I’ve frequently emphasized the power of compound growth and written about how effective it is at increasing the size of your investments over time. Even if it's only pennies, money doubling in value every day as described in payment option #2 is quite literally the definition of compound growth.
But surely a few pennies doubling each day over a few weeks can’t result in a significant amount of money. Even if the final sum is large, there’s no way it could be larger than the $750,000 you would make by choosing the $25,000 per day option. Compound growth can't be that powerful...
Let's run the numbers and examine the results.
Day Payment Option #1 Account Value Payment Option #2 Account Value
1 $25,000 $0.01
2 $50,000 $0.02
3 $75,000 $0.04
4 $100,000 $0.08
5 $125,000 $0.16
6 $150,000 $0.32
7 $175,000 $0.64
8 $200,000 $1.28
9 $225,000 $2.56
10 $250,000 $5.12
11 $275,000 $10.24
12 $300,000 $20.48
13 $325,000 $40.96
14 $350,000 $81.92
15 $375,000 $163.84
16 $400,000 $327.68
17 $425,000 $655.36
18 $450,000 $1,310.72
19 $475,000 $2,621.44
20 $500,000 $5,242.88
21 $525,000 $10,485.76
22 $550,000 $20,971.52
23 $575,000 $41,943.04
24 $600,000 $83,886.08
25 $625,000 $167,772.16
26 $650,000 $335,544.32
27 $675,000 $671,088.64
28 $700,000 $1,342,177.28
29 $725,000 $2,684,354.56
30 $750,000 $5,368,709.12
FIVE MILLION DOLLARS?? Five. Million. Dollars.
That’s right. If you had gone with payment option #2 you’d be over five million dollars richer. $5,368,709.12 to be exact.
How can this be? It’s all due to the power of compound growth. Even though it started small, the money in your account was repeatedly compounded, resulting in a truly shocking amount of growth.
Take Advantage Today
Now that you understand the immense power of compound growth, wouldn’t it be great if you could apply it to your own money? Luckily there is a surprisingly simple way to take advantage of compound growth. All you have to do is invest! If you’re unsure where to start, check out the GGD investment hierarchy. If you’re brand new to investing it may seem a bit intimidating, but it is imperative that you get started. After all, time is your most powerful investing tool. The longer you wait to invest, the more money you will cost your future self.
For me, the concept of a magical penny is the most convincing demonstration of compound growth I have ever come across (Note: all of the details above are original but the concept of a “magical doubling penny” is not a new one). If you’re failing to apply this concept to your money, you may be quite literally costing yourself millions of dollars. So, go open up an investment account today and start building your financial empire.
Tools To Get You Started
Get a head start on your journey toward achieving financial independence by analyzing and tracking your income, expenses, investment performance, and overall net worth with the free online wealth management tool Personal Capital.
We use Personal Capital regularly to analyze our investment fees, track our investments, and project our net worth. We also periodically review our progress toward retirement with their retirement planning calculator.
If you’d rather do things on your own, become a subscriber today and you’ll receive our Free Financial Planning Dashboard. This tool allows you to enter your income and expenses to create a detailed budget. You can use it to track your spending habits over time or just to get an idea of where your money is going each month. Take a look at the automatically generated charts and you may discover you have a little more cash to invest than you thought.
If you’re interested in detailed instructions on how to budget, save, pay off debt, and invest, check out The 6 Phases of Building Wealth. This book provides step-by-step instructions for working through each “Phase” in the process of achieving Financial Freedom. If you're just starting out, the information in this book will provide you with an invaluable resource. You can pick up the digital version for only $2.99 on Amazon.
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