How To Save A Penny A Day And Become A Millionaire

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save a penny a day

Did you know it is possible to become a millionaire simply by saving a penny a day?

If you can save a penny a day and earn interest on that penny, you will become a millionaire.

And it is all thanks to compound interest.

In this post, I am going to show you how simple it is to become a millionaire using compound interest.

And if you want to become a multi-millionaire, I’ll show you the simple plan for this as well.

So let’s learn how to save a penny a day and become a millionaire!

How Saving A Penny A Day Helps You Become A Millionaire

What Is Compound Interest?

To understand how you can become rich from compounding your money, we first have to understand the idea of compound interest.

Compound interest is simply earning money on your money.

But there is also a thing called simple interest.

It is critical you understand how both work.

For example, if you have $100 in the bank and it earns 5% interest, in one year you will earn $5 in interest.

Your ending balance will be $105.

The $100 is your savings and the $5 is interest the bank paid you.

This is called simple interest.

Compound interest is when you earn money on the interest you are earning.

It sounds complicated, but it is pretty basic.

Using the same example from above, if you have $100 in savings and earn 5% in compound interest, at the end of the year you will have $105.13.

Where did the $0.13 come from?

This is the compounding part.

During the year, as you were earning interest, that interest was also earning interest.

In other words, the $5 in interest earned another $0.13 of interest for you.

Now here is the great part.

As your savings increases, the power of compound interest grows.

This means you will earn more and more interest.

Here is a perfect example.

A Penny A Day Doubled For A Month | The Magical Penny

magical penny

This is a classic quiz that just about everyone gets wrong.

You have 2 options to choose from:

  • Double a penny everyday for a month and take the ending value
  • Take $1 million dollars in 30 days

What do you choose?

Most people take the million.

The thinking is that $1 million is so much more than a penny a day doubled for the month.

But taking the million dollars is wrong because of compound interest.

Here is proof.

After two days, your penny doubled to $0.02.

After 5 days your penny doubling is now worth $0.16.

Even after 10 days, you are looking at having $5.12.

But then it starts to get interesting.

After 20 days you are suddenly up to $5,242.88.

Just 5 days later you are at $167,772.16!

And on day 28, you now have over a million dollars, $1,342,177.28 to be exact.

And on the last day of the month, you end up with $5,368,709.12.

If you chose the million dollars, you would have $4 million less than if you took the penny doubling option.

It’s no wonder Albert Einstein is reported to have said “Compound interest is the eighth wonder of the world.”

Here is the penny a day doubled for 30 days infographic so you can see for yourself.

magical penny infographic

And if you want to do the math yourself, here is the formula for doubling money.

S = (first term)(1-r^n)/(1-r)

To solve, you input the following details:

  • first term: for this example it is 1 since we are starting with one cent
  • r is the ratio which for us is 2 since we are doubling
  • n is the time period which for us is 30 since there are 30 days in a month

The great thing is you can do this with any amount of money you want.

The Power Of Compound Interest

Remember when I said the more money you have, the more the power of compound interest works?

Here is proof.

Doubling a penny a day for 30 days gives you over $5 million dollars.

What about higher amounts of money?

Let’s look at doubling $0.25 a day for 30 days.

Here you end up with $134,217,728!

If you double $1 a day for a month, you end up with $536,870,912!

And this is just for 30 days!

Take a penny a day doubled for a year and you end up with $375,766,813,243,813 followed by 93 zeros!

Basically you would own the world.

Compound Interest In Real Life

compound interest

Unfortunately, you are not going to earn an interest rate that doubles your money consistently over time.

It’s just not possible.

Most interest bearing savings accounts will pay you up to 5% interest.

If you saved a penny a day at 5% interest, it would take you 190 years to have $1 million dollars.

That’s a bummer.

But there are other options for you.

What if you saved $1 a day?

This would get you to $1 million dollars in 99 years.

This is better, but still not ideal.

What if you saved $10 a day?

You would be a millionaire in 54 years.

Another option is to increase the interest you earn on your money.

By investing in the stock market, you can earn 8% on your money.

Saving $10 a day at 8% gets you to $1 million dollars in 40 years.

Using Your 401k To Become Rich

If you are covered by a 401k plan at work, here is how you can use it to become a millionaire.

We will assume your employer matches 5% of your contributions.

Here is what this looks like.

Let’s say you save $300 a month in your 401k plan. This is $150 per paycheck if you are paid twice a month.

In 40 years earning an average return of 8%, you will end up with just over $1 million dollars.

This isn’t taking into account the employer match yet.

When we add the employer match in, you are still saving $300 a month and your employer is adding $187.50 for a total of $487.50 per month.

Take this out 40 years and you end up with more than $1.6 million dollars.

By simply getting a match from your employer, you end up with an extra $600,000!

What if you don’t have a 401k plan or you want to invest a different way?

This is where Acorns comes in.

Acorns is an investing app that allows you to invest small amounts of money every month.

For example, if you want to invest $10 this month, you can invest just $10.

But it gets better.

Acorns will invest your spare change too.

When you turn on the round up feature and link your credit or debit card, every time you make a purchase, the amount you spend will get rounded up and invested.

For example, let’s say you spend $53.17 on groceries this week.

Acorns will round up your purchase to $54.00 and take $0.83 from your checking account and invest it in your Acorns account.

Note you won’t have a lot of small transactions like this.

Acorns waits until you have $5 in roundups before it makes the transfer.

There is nothing else for you to do.

Acorns Box

Here is an example of how this works for you.

The average person invests $500 in roundups per year.

If you invest $15 a month on top of this, you invest a total of $680 a year.

In 40 years, earning an average of 8% interest, you end up with close to $200,000.

And all you did was invest your spare change.

Finding Ways To Save Money

ways to save money

Every time I explain this idea to people they get excited.

They see they can be rich.

But then I wait.

I know the disappointment is coming.

I can count it down in my head.

Almost always by the time I get to 5, they tell me they can’t afford to save $300 a month.

This post isn’t about showing you the many things you can do to save money.

But the good news is I have many posts that do explain how to do it.

Here are a handful of posts to look into.

By reading through these posts, you will easily find ways to slash your expenses and will have no problem saving $300 a month.

From there, it’s all about being patient and letting compound interest do its work.

Frequently Asked Questions

Frequently Asked Questions

There is a lot of confusion about compound interest and saving a penny a day.

Below are the most common questions I get asked.

Can compound interest make you rich?

Yes it can.

You just need to find a decent return on your money and make sure you are saving money on a regular basis.

For example, if you earn 8% investing in the stock market and save $250 a month, you will have close to $1 million dollars in 40 years.

And if you want more than this, simply save more money every month.

How can I compound my money fast?

The best way to compound your money fast is to invest in the stock market.

This will get you on average an 8% annual return on your money.

From there, all that is left for you to do is to save as much money as you possibly can.

Once you have a decent nest egg saved, compound interest will work its magic and grow your money fast.

What is the compound interest rate?

Interest rates change all of the time depending on the economy.

This is why you will sometimes see interest rates on savings accounts as high as 5%, like back in the early 2000’s.

But now, interest rates on savings is 1% or less.

With the stock market, the return you get on your money varies as the market goes up or down.

Overall and over the long term however, you can expect to earn an average of 8% annually.

Remember though this is an average.

That means some years you will earn less than this, possibly even lose money and other years earn much more than 8%.

Is compound interest a good thing?

Compound interest is a great thing.

Without it, you would have a hard time growing your wealth.

By allowing the interest you earn to earn additional interest, you grow your savings faster.

Can I get rich by saving pennies?

Theoretically as I showed with the magical penny, you can.

But you can’t get that high of a return on your money in the real world.

Because of the lower return, you need to increase your savings.

The more money you can save, the more your money works for you and earns interest.

And as your savings grow, the interest you earn will outgrow the amount you have saved.

What is simple interest?

Simple interest is the interest that is charged on many loans you take out.

You simply multiply the interest rate by the loan amount by the length of the loan.

Loans use simple interest while savings vehicles typically use compound interest.

What is the formula for simple interest?

The formula to calculate simple is the following:

A = P(1+rt)

Here is how to do the math:

  • P is your initial investment amount
  • r is the annual interest rate
  • t is the time invested in years

The key is to make sure you use years and not months when calculating time.

What is the formula for compound interest?

The formula for compound interest is as follows:

A = P(1+r/n)^nt

Here is how to do the math:

  • P is your initial investment amount
  • r is the annual interest rate
  • n is the number of times interest is applied during the time period
  • t is the time invested in years

The trickiest part of compound interest is the number times compounded.

Many savings accounts now will compound daily.

This means the interest you earn will start earning addition interest the very next day.

Unfortunately, when you are first starting out, you don’t notice the benefit of daily compounding.

But as your balance grows in time, this is why you begin to earn more interest than the amount of money you have saved.

Wrapping Up

At the end of the day, compound interest is something you need to know and take advantage of.

And while saving a penny a day and having it double every day is not possible in the real world, the idea behind it is.

If you can make it a habit to save money every month and earn a decent return on your savings, you are going to grow your wealth.

And one day, there is a good chance you will be rich.

You just need to have patience and let time works its magic.

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