If I offered you a million dollars today, what would you say?  Here are your choices:

1) Sure, I’ll take that one million dollars today!

2) I’d prefer a shiny penny that will double in value for 31 days.

The compound effect takes a small amount of something and grows it over time.  This is the key to investing and something I tried to impart on my kids when they were young.

One of the most powerful and incredible investing secrets is the compound effect.  You’ve probably already caught onto my trick and guessed that the shiny penny is worth more than a million dollars, but it just doesn’t seem possible, right? 

I remember when I was 19 years old and I wanted to invest some money in the stock market, which is when I learned about this magical compounding effect.  I visited with a stock broker from Dean Witter, and he was a very nice guy who spent some time with me to figure out how and where I should put my huge savings of $2,000 into the stock market.  Big decision!

However, none of those options mattered.  It made no difference whether I placed the money in some stocks, bonds, or a mutual fund.  What mattered was what he handed me on a simple single sheet of paper: a magic formula that I had never seen before.  I wondered, “did others know about this magic?”

Here it is… are you ready?

If you take a penny and double the total amount accumulated every day for 31 days, you end up with $10,000,000.  That’s right, ten million!

Don’t forget to double it once more on day 31 to get to 10 million!

Equipped with this invaluable magic, I intended to use it to the fullest extent possible!  From that eye-opening day on, I started to use the magic formula as a motivational tool for investing and creating wealth for me, and for my family’s future.

I have four kids who are all now adults (one is even married, if you can believe it).  Many years ago, when they were younger and I had them all around the dinner table (the best time of the day because the whole family was together), I proceeded to show my kids this magic formula that I learned at 19 years old.  You should have seen their eyes light up.  For once, I had not bored them with some run-of-the-mill parenting advice.  They were excited about learning how to make more money while they were sleeping. 

Now, the penny is an extreme example because we can’t find investments out there that produce those kinds of returns.  But the concept is the same as you can see in the chart below, which starts with an initial investment of $10,000.

This chart here shows how much an initial investment grows over time when compounded.  Can you believe that $10,000 could grow to more than $452,000 in 40 years at just 10% with compounding?  That is a reasonable amount of time for anyone saving to retire!

The magic formula is all about increasing the value of your money by constantly reinvesting and letting your returns build upon themselves until the amount grows to more than you can imagine.