How much money do you need to save each day to have a million pounds? £50, £100? Not quite. Investing £7.45 each day can make you a millionaire by the time you retire. That’s 2 cups of coffee, or a couple of pints at a bar. I really hope your reaction to this is one of excitement, anyone can join the millionaire club. Using three things, smart investments, compound interest, and time, let us look at how we can grow these small savings each day into something spectacular. Let me explain:
An ancient Indian King claimed to be the greatest chess player in his kingdom, and promised any reward to someone who could defeat him. One day, a young economist entered the palace to challenge the King. Within minutes, the King was put in a swift checkmate and being a man of his word, asked him to name his reward. “Simply a grain of rice on the first square of the chessboard. And then double that to two on the next square the following day. And double it again to 4 grains the next day, and continue to double them each day until we reach day 64, the final square of the board.” The King laughed at such a small request and instructed one grain of rice to be brought to the economist. He returned each day to collect his reward, collecting a few more grains each time. By the 10th day he collected 512 grains of rice, barely enough for a few mouthfuls. However, by the 21st day he claimed over a million grains of rice, a large sackful. Realisation had now dawned upon the king. The power of compounding meant that by the halfway point, day 32 , the young man would be collecting 2 billion grains of rice, more than the kingdom’s entire production. The king summoned the mathematician, and begged he reconsider his reward, or the kingdom would soon become bankrupt. The young man paused for a moment, a hush descended over the palace room as he considered the offer. After a great deal of thinking, he looked the king square in the eyes, and said. “I’ll accept. But on one condition…. That You like the video and subscribe to Summitnomics down below.”
I have loved this story since I first heard it. It demonstrates the power of compound interest, which Albert Einstein reportedly claimed to be ‘the eighth wonder of the world”.
Compound interest is your greatest ally in growing your wealth, and it works without you having to lift a finger. Picture a single pack of seeds, that can grow into a few flowers, which give us more seeds to grow more flowers, and so on, until we have a full meadow. Your money can do the same when invested. If I invest £1000 at a 10% rate of return, I have £1100 in the bank after year 1. I then earn 10% again this year, BUT ON the £1100, taking me up to £1210. Notice I earned more interest in the second year than the first as the 10% rate of interest is able to work with a bigger pot of money than the year before. This trend continues, and IF GIVEN TIME, can allow your money to grow to phenomenal levels. After 40 years of growth, that £1000 will grow to over £50,000! (53,700.66).
However, A 10% return may be difficult to achieve. Jack Bogle, the legendary investor and founder of Vanguard said “we as investors are entitled to our fair share of the market’s returns, no more, no less.” The S and P 500 returns an inflation adjusted average of 7% annually. This is the compounding we can take advantage of. If you started at 18, and saved £226 each month until you retire at 65, this 7% return will mean you have invested a Toal of £127,690 into the account. However, compound interest will have grown your money, like the rice, to give you a retirement pot of ONE MILLION POUNDS. If your immediate reaction to this is, I can’t afford £226 a month to invest, instead ask your self, can you afford NOT to do this when it has the potential to make you these kind of returns. apart from 5 minutes a month online, this requires zero effort. What other investment, like your own business, or property, can generate this level of return for so little effort.
Still sceptical about the power of compounding? On day 32 of the chessboard, we leant that our economist had more rice than the entire kingdom. If he continued doubling his rice, by day 39, he’d be entitled to collect more rice than the entire world produced in 2019. And on the final square of the board, day 64, he would collect over ONE QUINTILLION grains of rice, (18446744073709551615). By my calculations, this is enough to cover the entire planet in a layer of rice.
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DISCLAIMER: Please note, I am not a financial advisor. Just an economist with a keen interest in personal finance. This is not trading advice, any risks you take in the stock market are your’s alone.
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