Miracle of Compound Interest (video)

– Posted in: Personal Finance

The miracle of compound interest can convert a lifetime of small savings into a large comfortable retirement. This video makes the point dramatically by imagining a penny doubling every day for a month. The same miracle is happening everyday with small percentages over long periods of time.

Read the transcript about The Miracle of Compound Interest

Some people describe compound interest as ‘the eighth wonder of the world’.  We want to understand this so that we can collect it, and won’t be doomed to pay it.

I’m Rick, and this is about the miracle of compound interest for financing life.

The Miracle of Compound Interest

What’s your guess? Start with a penny and double it everyday for a month. How much would you have?

Let’s start with an example.  Suppose we start with a penny and double it every day for a month.  The second day we would have two pennies.  The third day we have four pennies.  At the end of the first week, we have 64 cents. At the end of the second week, we have more than 80 dollars! The third week, more than 10 thousand dollars! The fourth week, more than one million dollars! And on the 31st day of the month, we have more than ten million dollars!

Wow! That’s a miracle!

When we invest money, it grows over years, not days.  But it is the same miracle.

When we earn interest, those earnings can be put to work for us as well.  That’s what compound interest means.

This example is a vivid demonstration of compound interest.

Doubling your money everyday would be a 100% return—per day! While that’s not going to happen, it does illustrate the amazing miracle of compound interest.

Well, ok.  Your money is not going to grow at 100% per day like in this example.  It grows over years, but it’s the same miracle!

Here's what compound interest can do over your lifetime.

This is more realistic: an investment of one dollar earning 9% per year might double ten times over your lifetime. The miracle of compound interest even works with small percentages over longer periods.

Let’s say your grandmother invested $1 for you on the day you were born at, say 9% per year.  That money will double every eight years — it will be worth $2 on your 8th birthday.  And, as we saw before, the longer you invest it, the faster it grows.  It keeps doubling every 8 years!  By your 80th birthday, that $1 has turned into one thousand dollars!  Neat huh?

Time is our friend, so it is important to start saving early.

Find other explanatory videos, smart tips, and links to useful resources at FinancingLife.org.

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Opening photo: The Aurora Borealis, or Northern Lights, shines above Bear Lake, Eielson Air Force Base, Alaska. The photograph was taken by Senior Airman Joshua Strang of the United States Air Force and is in the public domain.

Tree: The beautiful tree in this video is a photograph taken in Switzerland by Stefan Wernli and licensed under the Creative Commons Attribution Sharealike license.

Music: The guitar music is the song Tapestry written and performed by David Modica on his Stillness and Movement album distributed and licensed by Magnatune Records.

This video may be freely shared under the terms of this Creative Commons License BY-NC-SA 3.0.

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Video copyright 2009-2013 Rick Van Ness. Some rights reserved.

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