A math problem for the ages: would you rather have a million dollars right now or a penny that is doubled every day for a month? Several math teachers have tried to trick people with this problem. Although it probably got most of them the first time, once they looked at it more carefully, taking the doubling penny is the obvious answer. This is a classic example of compounding: building wealth from previous earnings. Like successful investing, the penny problem requires you to choose between immediate satisfaction and investing patiently, which can ultimately result in far more wealth.
When you first consider this penny problem, the math certainly doesn’t look promising. After 21 days, more than two-thirds of a month, you will have just surpassed $10,000. That doesn’t sound like much in the shadow of a million bucks. But in that last third of the month your money increases by more than 500 times. On day thirty you would have over five million dollars. Your theoretical patience really pays off.
While it’s a fun problem to imagine, those math teachers can’t actually double that penny for us. Luckily, an understanding of sound investment strategies and simple investment tools like Evati can help you out. The trick is commitment and patience. In the penny problem, your pennies accumulate slowly at first until that final week where suddenly everything comes together and you realize you made the right choice. It works kind of like a rocket ship: in the first ten minutes of flight, the rocket uses almost all of its fuel just to get into orbit. For the next few hours it uses far less fuel for minor corrections and a smooth flight to the moon. Investing can be like that rocket ship—it takes a lot of energy and willpower to ignite the engine, but once you get started it’s smooth sailing. It can seem rather bleak at first with very little return and putting in a lot of work to invest money, but once you reach the moon all of that is forgotten.
You might want to start your investment with more than a penny, but it doesn’t have to be much. It can be as little as five dollars per day. That may seem like a lot, but there are plenty of savings hacks out there to make saving easier, such as reevaluating monthly subscriptions that might be draining your checking account each month.
Once you commit to five dollars per day, you will have to rely on patience. If you just saved five dollars everyday for one year you would have almost $2,000, which sounds pretty nice because in just five years you would have $9,125. But you want to make earnings off of your previous earnings—to compound your returns. One way to do that is to stash your five dollars a day in a savings account at a bank that earns interest. But, banks these days are only paying about 0.01% in interest, which isn’t much. If you put five dollars a day into one of those accounts, you’ll end up with about $9,128 after five years, an increase of only three dollars.
Fortunately, there’s a better way to compound the returns on your savings. If you put that five dollars into an investment account you’ll enable your money to work even harder for you. If you assume that investment account has an expected annual return of seven percent (which is healthy, but not outlandish), your five dollars per day would be worth $10,829 in five years. In ten years, your five dollar per day investment would be worth more than $26,000.
In fact, if you keep up your savings habit of five dollars a day, the expected value of your portfolio would increase to over $538,000 forty-five years after you started, just in time for retirement. That’s where the patience comes in, because you have to let your investment work over time. And the earlier you start, the more time you will have to let compounding work its magic.
With commitment, patience, and a simple investing tool like Evati, you can create financial insurance for your future which means more freedom later on. Of course there are no guarantees in the markets and you may not achieve a seven percent rate of return every year, but over time there is a general upwards trend and through smart investment you can expect significant growth. Don’t just take that one penny up front; think about its future potential. It’s not sacrificing everything fun in your life, it’s being smart with the money you have now so that later you can spend it on once-in-a-lifetime experiences or whatever you dream of for your retirement.