How Chuck Norris Changed My Life With A Penny
I really wanted to start this post with a Chuck Norris joke about a penny, but my wife has informed me that everything I came up with was embarrassingly lame! So, I’ll forego the joke (feel free to use the comment section to share your own!) and jump right into the power of compound interest.
A long time ago as a kid, I remember watching Walker Texas Ranger (the details are a bit fuzzy) and I believe Chuck was visiting a class and teaching on the importance of thinking through their decisions and not just going with the first answer that came to mind. To do this, he asked the class, “Would you rather have a million dollars today, or take a penny doubled every day for a month?”
Of course, most of the kids said “a million dollars today, duh!” But Chuck went on to explain how that is the wrong choice, because a penny doubled every day for a 30 day month ends up being worth over five million dollars! I was fascinated and can point to that episode as one of my earliest ‘aha’ moments for personal finance – the power of compounding captivated me at a very young age.
How Chuck Turned A Penny Into Millions – Compound Interest
Here’s how it works – take a penny, double it, then keep doubling the prior day’s amount for 30 days. Don’t believe this ends up being millions? Here’s the evidence:
As we can see, our experiment is looking pretty bleak for the first couple weeks. But then things get really exciting, and our little penny has turned into more than $5 million dollars by the end of the month. Unfortunately, I haven’t yet found an investment which doubles in value daily (that’s what we call a unicorn!), but this example serves to illustrate the power of compounding in an easy to understand, albeit dramatic way.
Focus on the beginning – not the end
It’s easy to see this example and focus on the end – ‘wow, five million dollars – that’s amazing!’. But the real lessons for us are in the beginning. Unfortunately, those first ten days or so are really boring. One penny turns to two, two to four, four to eight… and so on. It takes eight days just to get to a dollar. Not very exciting, right?
What if we ignore or skip the first ten days? It would be pretty easy to do seeing as how not much is happening. Yet, this would be quite the mistake! Because if we skip the first ten days, we end up with only $5,243 – just 1% of what we may have had otherwise.
So, while the beginning is pretty boring, it’s fair to say this is the most pivotal time. If we extrapolate this to real life, what I see happening is so many people are missing out on those metaphorical first ten days. Think of it as our 20’s and 30’s – these are the foundational years.
The slowness of progress in the early part of our example is one of the main reasons why so many people feel fine waiting until later in life to start investing. It’s a little boring and not much is happening – on day 5 we still only have sixteen cents! And when put in perspective of normal investment returns, each day in this example could actually be many, many years. Because of the relatively slow start, it’s easy to rationalize spending money on other things, waiting until we have more income, embracing a shortsighted #YOLO perspective on money, or just not thinking about investing it all.
Do not underestimate the power of compound interest. You want… no, you NEED this almost magical power on your side as early in life as you can! It is so critical to not wait until later in life to start putting your money to work for you.
How do we do that? By investing. Investing early. Investing often. Investing consistently. Investing wisely. Investing with a long term perspective.
There a number of valuable lessons this illustration can provide:
- Starting early is crucial. There is a saying which I believe is true, “Investment success is more about time in the market than timing in the market.”
- Compounding is boring at first, but really exciting later. Though much less dramatic in real life because there are no investments which double in value every day, it is fair to say that the first $100k is the hardest and after that it really does start snowballing at a remarkable rate (*remember – market returns are not linear. Values go down, sometimes by a lot. Think and plan in terms of decades, not days, weeks, or even years.).
- Think long term. As a millennial growing up in a first-world economy, I’ve benefited from a level of instant gratification which is unparalleled in history. A side affect of this, however, is often a lack of patience. We expect things to happen quickly and when they don’t, we move on. But investing and harvesting the power of compounding is a long game. Don’t give up when it seems like nothing is happening! And don’t act rashly just because everyone else is doing something – like panic selling.
- Build behaviors from the start which will allow for mature handling of wealth later. Behaviors should include diligence, discipline, patience, perseverance, gratitude, long term planning, an internal locus of control, and grit, among others such as a life long pursuit of learning. These not only reinforce the wealth building process, but will help manage wealth responsibly once we have it.
In short, compound interest is incredibly powerful! Einstein is often credited with the following quote (though we aren’t 100% sure he really said it!):
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
Whether Einstein said it or not, the statement itself is true. This powerful force is something that, sadly, many people spend fighting for the majority of their life (and probably don’t even know it!). But if we can get this almost magical power working for us, preferably as early in life as possible, it can provide us with a tremendous amount of freedom. For those who diligently apply this lesson (and unless the economy / world just completely fall apart!) there will most likely come a day when investment earnings exceed income from a day job – and that, my friends, is a sweet day!
This lesson is one of the primary pillars of Financial Independence. Master it and thrive. Ignore it at your peril.
This episode of Walker Texas Ranger was the first time I can recall hearing about the power of compound interest. It’s an example which stuck with me through the years and I continue to benefit from and share it with others today. I can’t wait to teach my daughter about compound interest using this illustration!
It no doubt played a role in my choosing to study Finance in college and why I started investing in middle and high school. And because of that, it’s fair to say that Chuck Norris really did change my life with a penny! While this post is highly metaphorical, we’ll have another post soon which details the power of starting early with a more realistic / practical example.