There is a calculation I saw that immediately stopped me in my tracks and raised the “doubt” flag. It says: if you doubled a penny for an entire month, you’d have over $10 million dollars by the end of day #31. Really?! No Way!
Of course, I opened an Excel spreadsheet and plugged in a few quick calculations. Here’s what it showed:
By day #18 a penny doubled is now worth $1,310.72
By day #28, we’re well over a million dollars at $1,342,177.28
And, by day #31, we’ve crossed the $10 million mark with a staggering $10,737.418.24
Hot damn! For real!
So, how can I apply this to “real” life? More importantly, how can I make this work in my own finances?
Turns out, there are two keys:
(1) Investing your money – right now!!
(2) And, let it ride for years and years and years
Here’s the secret to this miracle: We NEVER touch the principal. When we put money aside and leave it untouched to collect interest year after year, the result is nearly miraculous. You can clearly see this in the table above.
The truth is that most people don’t have a plan (nor a method) to gain access to their money while still allowing it to compound uninterrupted. This is why most people fail to accumulate substantial savings during their life. The “miracle” of compound interest works best uninterrupted and over time. If you “kill” the miracle, it doesn’t work!
We know that interest is just money we pay directly into someone else’s pocket. When interest is compounded, it is added to our balance. Then, the next time we pay interest, we’re charged on the principal, plus the interest charges from the time prior. One of the reasons credit card debt is so painful is that many cards compound interest daily. This means our balance grows every single day, just from the interest.
Make sense? Compound interest in savings is good. But in a loan, debt is the fast lane on the road to poverty. When we have to pay interest on debt, we’re giving away the one resource we need to become wealthy.
The lesson here is that it takes time to grow wealth. In fact, time is probably the most important piece in this whole savings equation. That’s why it’s imperative we begin saving early. As we can see, it’s the last double that is the most exciting. Don’t rob yourself a “double” by waiting to save.
If you’d like to talk about getting your money working for you, let’s chat!