When I was in grade school I had a math teacher who was thoughtful enough to teach his students about the power of compounding. He used a simple illustration to demonstrate what would happen if you compounded the smallest amount of money possible over a 30 day period.
Even though it may seem to be a childish grade school lesson, it has stuck with me for more than 37 years. In fact, it is one of the lessons that helped to inspire the Wirespeed Wealth concept, a concept based on creating wealth from a small amount of money. If you bear with me, hopefully I can pass on the significance of this lesson.
The teacher began his illustration with a question: "How much money would you have if you multiplied the product of a penny by 2 over a 30 day period?" We all sat there and thought about it for a moment, and then began to shout out our answers (we were 4th graders). To our surprise we were not even close.
If you are a math whiz then you already know the answer to this question. If not, then you would start by taking a penny and multiply it by 2. Then on the second day take the 2 pennies and multiply them by 2, and on the next day take the 4 pennies and multiply them by 2, repeating this process until you reach day 30.
Re-examining this lesson begins to shed light on why attempts at saving money may seem to be discouraging, especially for an instant gratification society such as ours. Saving small amounts of money just doesn't seem to add up fast enough for us. Just imagine you were doing this over a 30 year period, instead of only 30 days!
If you calculate to the 10th day you would have saved the grandiose sum of $10.24, enough to by lunch at a local deli. This hardly seems inspiring enough to continue with the savings plan. By day 16 you have managed to save just under $656.00, which is enough to pay a month's rent on a decent studio apartment, depending on where you live of course (that might be a stretch in light of today's economy). But, if you can make it to day 17 your savings jumps to over $1300.00, which makes a nice rainy day fund should your car break down on your way to work one morning.
A savings account with a balance of $1300.00 does not make you financially wealthy. However, if you are patient and consistent by the 27th day you would be a millionaire, with over 1.3 million dollars in your account. And by the 30th day you would have accumulated well over 10 million dollars.
I promised to elaborate on the significance of this lesson, so here goes. While it is unrealistic to suppose that anyone can save over 10 million dollars in 30 days, this illustration demonstrates that it is possible to save significantly, starting with a very small amount of money. Three factors are necessary for a successful savings plan, and they are:
- Starting a savings plan.
- Having the consistency, patience and discipline to stick with it, watching it grow significantly over time.
- Knowing where to invest your savings in order to increase its potential growth.
[Image Credit: The Far Side by Gary Larson]
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