Albert Einstein knew a thing or two about investing…

I’ll explain down below. In the meantime, I want you to answer the following question as fast as you can based on your gut instinct:

albert_einstein.jpgYou have been offered a job contract for exactly 30 days and 30 days only. You have to choose between two ways of being paid:

1) $100,000 per day

OR 

2) You start at 1 penny for your first day, but every day your pay doubles. (i.e. your pay on day 2 is 2 pennies, and you earn 4 pennies on day 3, etc.)

Which pay structure would you choose? Make your decision RIGHT NOW.

If you were like me, you would have a feeling in the back of your mind that it probably would make more sense to choose the doubling pay since the power of compounding growth is explosive, given time. But then you would do the quick math and consider that $100,000 per day for 30 days is a cool $3,000,000! So, if you were like me, you would have chosen the $100,000 per day.

Let me give you some more information – and see if you would change your mind. I will tell you that for the "doubling pay" scenario:

On Day 10 you would have earned $5.12 for that day.

On Day 20, you would have earned $5,242.88 for that day.

Perhaps the $100,000 per day is starting to sound like it was indeed the right choice? Well if you DID pick the $100,000 per day like I did – then I’m glad I wasn’t the only person who got it wrong! I’ll spare the explanation and just show you the chart:

Day 1          $0.01

Day 2          $0.02

Day 3          $0.04

Day 4          $0.08

Day 5          $0.16

Day 6          $0.32

Day 7          $0.64

Day 8          $1.28

Day 9          $2.56

Day 10        $5.12

Day 11        $10.24

Day 12        $20.48

Day 13        $40.96

Day 14        $81.92

Day 15        $163.84

Day 16        $327.68

Day 17        $655.36

Day 18        $1,310.72

Day 19        $2,621.44

Day 20        $5,242.88

Day 21        $10,485.76

Day 22        $20,971.52

Day 23        $41,943.04

Day 24        $83,886.08

Day 25        $167,772.16

Day 26        $335,544.32

Day 27        $671,088.64

Day 28        $1,342,177.28

Day 29        $2,684,354.56

Day 30        $5,368,709.12

 

Okay, so without adding up the running total, you can just look at the last day and see that $5,368,709.12 for that one day is more than the $3,000,000 you would have earned with the $100,000 per day scenario!

This is an example of the power of compounding growth. It is such a powerful concept that when Albert Einstein was asked (during the height of the interest generated by his work in physics and the Special and General Theories of Relativity) if the concept of relativity was the most important concept man will ever discover: he answered, "The most powerful concept in the universe is compound interest."

And who am I to argue with Al? :)

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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  • moneygardener

    Great Post….to bad my portfolio doesn’t move like that.

  • Preet

    Thanks MG – you and me both! :)

  • Dividends4Life

    Great read! I enjoyed the post and plan to highlight it in my weekly carnival recap.

    Best Wishes,
    D4L

  • Preet

    Thanks D4L!