Albert Einstein famously called compound interest the eighth wonder of the world. Compounding is indeed a powerful force. Yet I’ve noticed that many people don’t understand just how powerful it is. More importantly, they don’t understand that compounding is applicable to other aspects of life, not just money. Relationships, effort, knowledge—all of these and more can benefit from compounding.
I tried recently to communicate the power of compounding to someone but failed miserably. The concept didn’t resonate with them. It wasn’t their fault. I realized I wasn’t doing a great job of explaining it in a simple way that everyone can grasp. I searched for a simple way to communicate this powerful concept and found a helpful monetary example.
Start with a penny. Double it on day 2. Then keep doubling the amount you have every day for thirty days. How much do you think you’ll end up with? The answer is over $5 million, an astronomical amount, all because of compounding. To be exact, $5,368,709.12. Not sure how you go from a penny to over $5 million in a month? Here’s a breakdown of what happens when you double the amount you have every day:
A few things to note:
- It takes 15 days for the value to surpass $100.
- On day 18, the value surpasses $1,000.
- On day 21, the value surpasses $10,000.
- On day 25, the value surpasses $100,000.
- On day 28, the value surpasses $1,000,000.
This is a great example that most people can understand. It demonstrates that most of the benefit from compounding is backloaded.
- Days 1–15: $100 added
- Days 16–30: $5.3+ million added
- Days 28–30: ~$4.7 million added (or 88% of the final amount) in 3 days!
This example also does a great job of showing how powerful it can be to stick with the process even though the payoff is small in the beginning. The small amount you have in the early days provides the base required for future compounding. Without the $100 gained in the first 15 days and the continued compounding, you never reach the $5.3+ million on day 30.
While this example is monetary, the concept of compounding is applicable to various aspects of life. If you start something and stay consistent over a long period of time, you’ll likely see outsize benefits toward the back end due to the compounding of your consistent efforts.