The Magic of Compound Interest

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What is compound interest? It is the money you earn by re-investing all the interest you earn. Compound interest is how the rich get richer.

Here’s an example of compound interest. You may have heard of this old chestnut: If someone were to offer you the choice between $1 million cash now, or a penny on day 1, with that figure doubled & compounded each day for 31 days, which should you take?

The correct answer is, you should take the latter because it will amount to $10,737,418.24. Sounds impossible, but the math works out:

  • Day 1: $0.01
  • Day 2: $0.01 x 2 = $0.02
  • Day 3: $0.02 x 2 = $0.04
  • Day 4: $0.04 x 2 = $0.08
  • Day 11: $10.24
  • Day 22: $20,971.52
  • Day 31: $10,737,418.24

Now it should be easy to understand why Albert Einstein supposedly said, “Compound interest is the greatest force in the universe.” Compounding interest is, after all, how the rich get richer.

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