But that’s where the miracle of compound interest comes in.

Suppose I handed you a penny and then doubled it the next day. Now suppose that I doubled your total value, not just the penny but the sum of what you had and I did it for every subsequent day for around a month. What would happen?

As some have rightly guessed, the answer is probably not very much. That assertion is true but only in the beginning of such an investment. But suppose the process is not interrupted but allowed to continue unabated for the rest of the month.
 

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Take a look at the table below and see what happens:
 

WEEK 1
Day 1	Day 2	Day 3	Day 4	Day 5	Day 6	Day 7
0.01	0.02	0.04	0.08	0.16	0.32	0.64

The first seven days nothing significant occurs. It’s still chump change since the total is not even a dollar. And in the second week, even though the doubling value has reached into dollars, it is still nothing spectacular. See below:
 

WEEK 2
Day 8	Day 9	Day 10	Day 11	Day 12	Day 13	Day 14
1.28	2.56	5.12	10.24	20.48	40.96	81.92

But now look at the third week. Something pretty amazing happens. The increasing total is no longer chump change. Doubling your investment every day now looks interesting.
 

WEEK 3
Day 15	Day 16	Day 17	Day 18	Day 19	Day 20	Day 21
163.84	327.68	655.36	1,310.72	2,621.44	5,242.88	10,485.76

Week four is when things get ridiculous. All of a sudden, we are talking about serious money especially at the prodigious rate that the investment keeps doubling at.
 

WEEK 4
Day 22	Day 23	Day 24	Day 25	Day 26	Day 27	Day 28
20,971	41,943	83,886	167,772	335,544	671,088	1,342,177

So at the end of the month this gets absurd because the numbers are outrageous.

Of course there is nothing in the market that doubles your money consecutively for every day of the month but that is not the point of this exercise. The table vividly shows how compound interest takes the sum of any given day and then turns it into a bigger total. But it is the following day that really counts because that total can be converted into even bigger amounts of a return on investment.

However, instead of looking at this exercise for 30 days, now imagine this process going on for 30 years or longer.

So in other words, a few decades can turn an investment of a nominal sum of money into fabulous wealth.

Of course, the hard part is getting past weeks 1 and 2 because it is fairly obvious that you are not making any headway. And that in itself is perhaps the greatest psychological barrier for young investors who don’t see the point of faithfully putting a portion of “every” single paycheck into a productive retirement investment. Even after a decade of consistent contributions, there will not be a whole lot to show for it.

Nevertheless, the tipping point occurs at the third week of the table when that small amount of money turns into serious cash. And for the ordinary person, that moment can occur after twenty years of continuous contributions to investments when 401ks, IRAs, stocks, and the equity of a house begin to have a substantial value.

And finally, the remainder of the month of this table is just part of that old adage that “it takes money to make money” and it is very true because it takes a large sum of cash in order to generate even larger sums. Now imagine after more than thirty years of investing a part of every paycheck, the total size of your investments will have swelled in size especially when you consider a completely paid off mortgage which means more disposable income.

Admittedly, the real trick is being able to reach the third week of this table so you can turn your small investment into a fortune. But this is not rocket science. The development of wealth comes from the earning power of compound interest. That is, taking what you have earned and using it to produce more money.

Alas, that is the fatal flaw of a huge number of the population.

We live in a world of 401k loans and home equity loans. When you start borrowing your own money, you rob yourself of that earning power. All of a sudden, you have less of a mechanism to produce income for you. Instead of money being socked away into your goose that lays the golden eggs, you stopped feeding the goose.

Now I will be the first to confess that I have made 401k loans and I have even temporarily stopped making contributions into my 401k because things happen.

And just as someone can unleash the chain of events to create gargantuan wealth this process works just as effectively in reverse. See “Debt - Curse of Compound Interest: Part 2” for a vivid illustration of how things can get out of control.

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