Ahh exponentials, the best way to tell everyone in the room how much of a nerd you are is to drop this beauty into a conversation. I’ve mentioned the effects of their growth a few times in the past, which is why I want to dive deep into their mechanics so that you can be sure of the power they have. If you want to check out some more examples, you should definetely check out some of my other articles!
This is my personal guide to long-term success, a great read for anyone wanting to break the slump they’re in, improve themselves, and pursue their dreams. If you are the type who would prefer to view the world through the lens of a good book, or looking for a better reason to pick up this fantastic habit, I would recommend this article on the power of reading!
The Penny Vs. One MILLION $$$
Whether you are totally new to the idea of compounding or have been a long-time investor, this is one of those classic mind-blowing examples that will either change your worldview, or remind you why you changed it in the first place.
So the question goes a bit like this. “Would you rather have one million dollars or one penny doubled every day for 30 days?” Most people would just take the money and run, and I don’t blame them, but with a little patience that penny will grow into over 10 million dollars thanks to compounding.
The secret is relatively simple, no matter what value you take to start, you are multiplying multiples. So day one you have 0.01 dollars, which is then doubled, or rather increased by 100%, which means that the next day you are increasing the amount by 100% of 200% the original amount, and by the next day after that you would be increasing it by 100% of 400%, since that day you increased the starting number by 100%, and then doubled that, making the 200% of day two equal to 400% on day three. Now imagine if you could do that with $100, or even $1000?
Sitting on Money – The Slowest Way to Stay Poor.
If you don’t already know who Dave Ramsey is, I’ve thrown his name around quite a bit, and as far as I’m concerned, he’s one of the world’s best financial advisors. He has written numerous books including The Total Money Makeover, which I highly recommend to anyone with difficulty controlling money.
His methods are simple, but effective, and throughout his talk shows and his books he will consistenly refer back to the power of investing and how it can change your future. The penny method is a very simplified version of what the Ramsey method teaches.
Dave recommends investing roughly 15% of income per year into a series of investments, spread out over several industries and varied types of funds, which I will explain further in a different article.
You might think that 15% seems like a deficient amount of money to save, assuming that you will work from 25 to 65(I hope to God nobody has to suffer like that) to be able to retire comfortably. If you only make $30,000 gross, say around $25,000 after taxes each year, 15% would come out to a measly $3,750 per year, after 40 years of hard labor, would only come out to around $150,000, so if you expect to live for another 10 years without breaking your back until the reaper comes calling, you would need to ration out your savings to just $15,000 per year, a significant decline from your previous standard of living. Of course there are 401k programs that will match, and maybe $30,000 per year does seem pretty livable to you. Well, let me show you what you’re missing out on.
Investing – The Ramsey Method
So let’s say that you don’t have ambitions to rule the world, or play the real estate lottery, or heaven forbid, the actual lottery. It is perfectly fine to live life 9-5 with time at home playing second fiddle, if that’s the life you want, go for it!
Whether you are the average, hard-working man or woman that just wants to live life, have some fun, and make the most of what you’ve got, or the Amazon Mogul of tomorrow, investing will be crucial to long-term success.
Let’s take a look at those numbers again. but this time let’s assume that you we’re wisely investing for those 40 years and not burying jars of money in the back yard.
So year one, you’ve got $3,500 just like before, but assuming that you’ve picked out some middle-pack investments and you average 10% per year (10% may be a little higher than middle-pack but the math is easy so bear with me). Year two, that $3500 has accrued 10% bringing it up to $3850, and the next year you’ve got $7350.
350$ a year seems pretty insignificant in the grand scheme of retirement, but I did some number crunching with the help of Google Sheets, a free online resource similar to Excel. If you want to try it yourself you just need a Google acount, and then you can use the =FV function to calculate the growth over X periods with the same input each year. I’ve put the chart below with some explanation of the numbers involved:
The total growth is your end product, number of cycles is represented by years, and the growth per period is the average growth from year to year.
Before, it would take 40 years of your life, grinding day after day, only to find yourself left with roughly $150,000 at the end of it all. If you instead were to invest $3500 per year, less than 15% of your income, it would take only 24 years to reach that same goal at 5% growth per year, cutting your time in half! And it only gets better the more capable you become with your investments. At 10% growth, it would take less than 20 years to reach that same amount, and that’s assuming you wanted to retire early, which as you are about to find out, probably isn’t worth it.
So, making just $30,000 a year, something the majority of people are capable of, given time and the will to improve themselves, in 40 years, with mediocre investing, you will be able to pool together a solid fund of $422,799.21, which would actually put you at a higher standard of living 10 years after you retire. That’s just the tip of the iceberg, because if you were to invest wisely enough to average 10% each year, that would bring you to a whopping $1,549,073.94, or about $150,000 per year for ten years, if you wanted to go out in style. (by the way, if you did the math from before, saving that same amount from the time you had a newborn i.e 18 years from college/tradeschool etc, you would have $159,597.11 to put toward their education, just a thought)
The beauty in all of this is that even someone who makes an average amount of money their entire life can one day become a millionaire. This isn’t just about you, its about your family, friends, children. It’s about your passion in life, and your ability to change the future. Save now, and one day you will have the security you want, and the power you need to make real change for the people you love.
Investing – Not Just for Stock
This goes back to the basic principle of dilligence. These principles go far beyond the realm of financial wealth. Understanding the power of exponential growth can give you better insight to handle other pursuits in life. Great athletes, mathemeticians, and public figures have spent years of their lives and countless hours to become the people they are today.
In short, if you start early and keep going at it, eventually good things will happen. You just need to trust in the curve.
If you like what you read or have questions, I’m always happy to know what people think of my work, so go ahead and tell me what you thought in the comments.
In the meantime here are some other articles I’ve written on similar subjects, be sure to check them out and tell what you think, thanks for reading!