The Doubling Penny Story

There is an old financial story out there where someone is asked if they would rather have $1 million now or a penny that doubles every day for a month.

Let’s look at what happens in this sort of situation. First off, credit to Carl Richards who reminded me of this story with a post he did recently.

Here is the TL/DR version (too long, didn’t read). If you take a penny and double it every day it will be worth just under $5.4 million after 30 days. The exact number is $5,368,709.12.

I have mentioned the old fable that Einstein is said to have called compound interest the most powerful force in the universe (I still don’t think he said it, but the facts hold true). As Carl points out, compounding is really boring. At least in the beginning.

After one week your penny is only worth $1.27. Does that even buy a bottle of pop from a vending machine?

15 days in you now have $614.40. Now we are talking some magical growth, but still a long way away from that option of taking $1 million now.

To reach that $5.4 million number you are going to have to be patient while boring old compound interest does what it does. How many of us are willing to be patient while boring happens?

Warren Buffett attributes a large portion of his wealth to the effect of compounding.  At age 30 he was worth $1 million.  At age 59 he was worth $3.8 billion.  Now, at age 93 he is worth roughly $130 billion.  Not shabby at all.

Oh, and I am pretty sure he would consider his investing style rather boring too. Boring, yet extremely successful, especially once you add the power of compounding over time.

While I know no investment that will double daily for a month, at least you can now answer the question of whether to go the doubling penny route or the $1 million immediately.