What would you choose $2,000,000 today or doubling your money daily for 30 days starting with 1 penny?

Think about it for a second….

The $2,000,000 glances at you at first sight versus the 1 penny offer. If you analyze it further you will see how the $2,000,000 will rob you from a bigger prize.

A friend of mine asked me this and the analysis behind it was delightful. How a single penny can turn into something major if you compounding day after day or in such cases like capital investing years after years.

Let’s use the above example and analyze it:

What would you choose $2,000,000 today or doubling your money daily for 30 days starting with 1 penny?By the time you reach day 10 you have compounded $5.12. Wait, $5 only by now? If you continue, by day 20 you will have $5,242.88 but this is still far from 2 million dollars. Towards day 27, 28 and 29 you will reach $671,088, $1,342,177 and $2,684,354. At this point, on day 29 the offer of $2 million would have been surpassed by a little over $650,000.

Day 1 1 cent
Day 2 2 cents
Day 3 4 cents
Day 4 8 cents
Day 5 16 cents
Day 10 $5.12
Day 20 $5,242.88
Day 27 $671,088.64
Day 28 $1,342,177.28
Day 29 $2,684,354.56
Day 30 $5,368,709.12

The importance to highlight in all this is the power of compounding interest. If you allow capital gains to compound year after year you will receive a better deal rather than withdrawing your gains. The opposite relates to debt (credit cards, loans, etc.), accumulation of debt is dangerous and if it carries interest on debt, could be disastrous. This is extremely important since most institution presents you with yearly interest rates, APR or performance tables without explaining the impact compounding interest rates have on your money.

Now, you can consider this critical aspect when financial advisors and credit agencies among others, introduce you with financial instruments that carry interest rates.

In the future we will talk further about investment performance and its comparison with other benchmarks and financial tools.

Alex Lopez O’Bryan

Sonoman Investments

For website click here: Sonoman Investments

For blog link click here: Sonoman Rx

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6 thoughts on “What would you choose $2,000,000 today or doubling your money daily for 30 days starting with 1 penny?

  1. This was a very good illustrative point. I remember when I was about 10 years old, my dad was teaching me how to play chess, on a side note he told me that if I took 1 penny and doubled the pennies on each square that by the time I reached the 64th square there wouldn’t be enough money in the world, my young mind was fascinated.
    A more challenging question would have been doubling the amount every year, would someone want to wait 30 years for $5.4 million? The overwhelming majority would say no, regardless of their age, the 20 somethings and the 40+ would say I need the money now! In Finance 101 we learned that cash flows received sooner have more value than cash flows down the road, or NPV = Summation of F(n) / (1+R)^n.
    Compounding interest is a great means to build wealth; consistently high rates of return are desirable. Unfortunately, in real life, higher return rates usually carry more risk, you may double in one year and lose over 30% the next year.

    Liked by 1 person

    • @Errol Vanderlip. Thank you for your comment. The chess analogy is a great example of the value of compounding. It is very true, the majority of the population has a “right now” mentality.
      When it comes to compounding it for 30 years instead of 30 days, it all depends to the level of interest you calculate your PV with. If you use 1%, you will still be higher than the original proposal. The higher the rate used to discount the FV back to PV, the lower the PV will be.

      Feel free to visit our website: http://www.sonomaninvestments.com

      Like

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  3. Pingback: Are you in the 22 percentage group? | SONOMAN Rx

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