Compounding Interest – Build an Army of Minions

Ancient_Minions

Reason For Concern

So I came across an article not too long ago stating that 66% of Americans don’t understand the concept of compounding interest. Did you get that? Two-thirds of our country, doesn’t understand what Albert Einstein refers to as ‘The most powerful force in the universe’! It’s no wonder why such a large percentage of our population seems to be in financial disarray.

Visualize The Concept 

Let’s first start with the basic concept. Hopefully if you’ve seen the movie Despicable Me, this won’t sound completely crazy, but we’re going to use ‘minions’ to make the concept easy to visualize for both adults and children alike.

Before we start, let’s make the assumption that minions are able to self-reproduce. So long before we had this army of minions running around, blindly serving their evil master; we start with a single lonely minion. Shortly thereafter this minion has reproduced to create 2 minions. Furthermore those 2 minions reproduced creating 4 minions, and before you know it, we’ve got an entire army of minions on our hands ready to serve us in any way possible. Sounds pretty simple right? Well this is essentially compounding interest in a nutshell

When we put our hard earned money to work for us it creates interest. Now, not only will our original money continue to work hard for us and earn interest but our interest is now also able to work for us and create additional interest. Our money continues to grow exponentially and before you know it you will have your own little army of money making minions working for you.

A fun way to explain this idea of money growing exponentially is to ask someone the following question; would you rather have a million dollars or a penny a day doubled every day for a month?  It turns out that a penny a day doubled for 31 days adds up to more than 10 million dollars! Of course no investment doubles daily but it’s a fun way to introduce the important concept.

million-dollars-or-a-penny

Utilize The Concept

There are plenty of online calculators out there you can play around with; such as this one at bankrate. The most important thing to remember is; time is your friend. As your time horizon gets longer, the effects of compounding interest become more significant.

Money’s ability to compound is one of its greatest features. Now that you are part of the exclusive 34% of people who understands this phenomenon, it’s time to take advantage. Compounding does not discriminate, and it works for anyone who chooses to take advantage of it, regardless of ethnic, economic, or social background.

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2 Responses

  1. What an awesome visual of compound interest!?!? Without a little math, i would’ve never guessed the pennies added up to that much!

    • FrugalFamilia says:

      Me neither! Without actually working through the math, I would have taken the cool 1M. Thanks for stopping by Tia.

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