Before we get into the 365 Day Penny Challenge, we need to get ourselves familiar with the concept of compounding. Compounding is a natural phenomenon often used by investors in financial markets. It’s what legendary investor Warren Buffet found out a long time ago and used it to his advantage to become one of the wealthiest investors on earth.
It’s true potential is best highlighted in an old fable about the king of India and the man who invented the game of Chess. After showing the King his brand new game, the king loved it so much that he offered the inventor a reward of his choosing. The inventor responded by saying:
“My wishes are simple. I only wish for this. Give me one grain of rice for the first square of the chessboard, two grains for the next square, four for the next, eight for the next and so on for all 64 squares, with each square having double the number of grains as the square before.”
The king, seeing this as a simple request, granted his wish. After a week, his treasurer came back and informed him that the reward would add up to an astronomical sum, far greater than all the rice that could be produced over the course of many many centuries!
In fact, the final number can’t even be presented on your average calculator as its 20 digits long.
This story shows the power of what can happen when you start with something small, but add exponential growth to the equation.
The 365 Day Penny Challenge uses the power of compounding to achieve some serious savings over the course of a year. Day one is simple, you put one penny ($.0.01) into a jar, bowl, bank account, or wherever you’d like to keep your savings. The second day you’ll put two pennies ($0.02) into your stash of savings. The third you’ll put three pennies ($0.03). The fourth day you’ll put four pennies ($0.04). And so fourth until you reach 365 days, where you’d be putting ($3.65).
Each day dropping in your daily amount really seems like nothing, even once you get to day 100 you’re only putting in one dollar, but at the end of these 365 days you’ll have an additional $667.95. Not a bad little yearly bonus for just saving a few pennies everyday.
Although the challenge might not buy you that brand new Porsche you’ve had your eye on, but here’s where we can use compounding and his trusty sidekick exponential growth to take things one step further.
Lets say we now take our 667.95 from the year and put it into a market index fund of the S&P 500, which is the 500 largest corporations listed on the New York Stock Exchange or Nasdaq Composite. It’s yearly returns have been roughly 12% since 1973. So after year one our pennies are at $748.10. Still not mind boggling numbers, but just hold on.
We also throw in continuing to do our penny challenge again, restarting each year with one penny on day one. So we now get to add another 667.95 to our investment each year.
If we fast forward ten years our pennies have now suddenly turned into a whopping $15,202.83. twenty years later our pennies are at $60,345.96. And forty years down the road, our penny challenge is now at a min-boggling $636,017.56.
All that from saving some a few pennies every day.