A Penny A Day
You have probably witnessed a tweet or some financial ‘expert’ on TikTok pose the question, “Would you rather have a million dollars today or a penny doubled every day for 30 days?” The purpose of this question is that today many people are inclined towards instant gratification due to one-day amazon prime shipping, subscription services, and on-demand entertainment. Not only is the $1,000,000 gift today significant, but if I don’t have to wait 30 days, sign me up! Heck, maybe I’ll even invest in it. Obviously, this hypothetical exercise is meant to make you think it through. Why bother asking the question if the answer is so obvious? In case you haven’t seen it, here is the math for a penny doubled every day for 30 days:
Now this isn’t just a post about a penny doubling, it is an exaggeration to show you what compounding interest is capable of, and how powerful it can be. I’m going to use this example to point out three very important concepts when it comes to investing.
Number one, You’re going to be underwhelmed… at first. If you notice in the graphic above, initially, the accumulation is very underwhelming. The daily credit hardly exceeds a trip to Starbucks for the first 12 days. By day 23, you’re barely making enough to cover a small salary. Keeping in mind that option one was $1 million right away, you’re at day 27 before you’ve accumulated even that! However, if you stick with it, the delayed gratification greatly outweighs the get-rich-quick option.
This brings me to point number two, The tortoise and the hare. With how quickly information can be shared these days and a handful of “investors” bragging about how successful they have been day trading, many people mistakenly believe that investing is a matter of correctly identifying the right place and the right time. What rarely gets mentioned is how much stress being in the wrong place or at the wrong time can actually put on your investments and mental health. Consider two investors; we’ll call them Diversified Danny and Speculative Sally, both with $100. Danny plays it safe and buys the S&P 500 index, while Sally puts all her money into one company, and both lose money right out the gate (it happens, just no one tweets about it). Danny loses 20%, or $20, and now has $80 left invested. Sally lost 50% and now only has $50 invested. Now I ask you, which is more capable of recovering? I answer that question in great detail in this article https://fsgmichigan.com/blog/why-it-is-better-to-lose-small-than-win-big.
Lastly, as I mentioned earlier, the concept here is achievable. There is a very simple calculation called the rule of 72 that can actually help you calculate the impact on your money. The rule of 72 is this: you divide your expected annual return by the number seventy-two, the solution is how often (in years) your money will double. The S&P 500 has averaged nearly 10.5% from 1926 through 2021¹, so let's assume an example where your stock portfolio actually does around 9%. The equation here would be 72 ÷ 9, so that would be eight years. You can put the same power behind your regular savings in the same way that doubling your penny eventually accumulates significant wealth.
As an investor, one of the most valuable tools in your tool belt is not a high level of knowledge of economics or a complex analysis tool, but rather time. Early and consistent participation in the capital markets is arguably the best way to be a successful investor. Even if you are getting started a little later than you had hoped, one thing I share with my clients often is a Chinese proverb: “The best time to plant a tree was 20 years ago. The second best time is now.”
Written by: Justin Meyer
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