the greatest little penny story

considered by many to be the greatest mind our world has ever seen, Albert Einstein, was once asked:

• what is the most powerful force on earth?

he replied:

• the law of compounding.

i had the absolute pleasure of working with my nephews this past summer and i was quite fortunate and very grateful that my brother in law was also there to help us out, as i do enjy the conversations we have.

let me give you some background information on this. my nephews are always asking me for a job so that they can make money. i have been hesitant because i know that a job does not solve money problems and i want them to understand this before they enter the "real world". i wanted to make sure that paychecks were not positively reinforced and that a job was negatively reinforced. because when i asked them why they want to make money, they replied that they wanted to be rich. i told them flat out that working at a job does not make you rich, it makes you broke. they did not understand ......YET, but they did after their first job!

the chat at our lunch times often turned to 'how do i make money?' as my nephews were very curious now that they were learning that a "job" is not all it is cracked up to be. you see they wanted a new Xbox and this was the motivation for them to make some money. after they received their first paycheck, they went out and bought one, but now they did not have any money left and needed more for their upcoming vacation. sound a little familiar?

they often complained about waking up TOO EARLY in the morning (on their summer holidays), working TOO HARD in the hot sun ALL day, and most af all: TOO TIRED to play their brand new Xbox that they purchased with their first paycheck!

my brother in law, carlos and i asked them a trick question to make a point.

the question was this: what would you rather be paid?

• 1. i could pay you 20 dollars an hour for 50 hours a week for four weeks, 1 month's worth of paychecks (they were being payed 10 dollars an hour). for a Grand total of 4000 dollars CASH, no deductions. this is guaranteed money in your pocket and is more than twice what you are currently being payed.
  

OR

• 2. i could pay you a penny a day compounded daily for 30 days (one month). this means you get payed 1cent the first day, 2 the second, 4 the third, 8 on the fourth and so on for 30 days.

now i did not explain to them yet that that the rich have their money work for them and that they do not work for their money. the first option represented a paycheck from a job and the second represented your money working for you.

my youngest nephew did not hesitate and chose the cash...

after all, cash is king!

his older brother hesitated and knew something was up. he said that he wanted the penny a day ONLY because he thought we were trying to trick them!

so i upped the ante.

i said i would double the 4000 dollars to 8000. which would you choose?

a great big smile spread across my younger nephew's face! he said he was definitely taking the cash, but his brother still held out for the pennies.

carlos and i said good, now do the math. let's all find out what we have to pay you.

we broke out the calculators, pens, paper and this is what it looked like:

first week
1) 0.01
2) 0.02
3) 0.04
4) 0.08
5) 0.16
6) 0.32
7) 0.64

by this point it was not looking good for my older nephew. 64 cents a day is not very much money, especially if you never get to play your Xbox! my younger nephew was starting to make fun of his brother.

second week
8) 1.28
9) 2.56
10) 5.12
11) 10.24
12) 20.48
13) 40.96
14) 81.92

now, this is starting to look promising to both of my nephews. they are realizing the power of doubling, but the younger one still was poking fun at his older brother because 8000 dollars is 8000 dollars.

third week
15) 163.84
16) 327.68
17) 655.36
18) 1,310.72
19) 2,621.44
20) 5,242.88
21) 10,485.76

this was the point where the youngest lost his smile and the oldest broke into a giggle.

fourth week
22) 20,971.52
23) 41,943.04
24) 83,886.08
25) 167,772.16
26) 335,544.32
27) 671,088.64
28) 1,342,177.28

both of my nephews were dumbfounded. they were both speechless at seeing these numbers. they could not comprehend that this amount of money came from pennies. i reminded them that this was per day, not per month or year and their jaws dropped!

final two days
29) 2,684,354.56
30) 5,368,709.12

when i said that the total for the month would be over 10 million dollars ($10,737,187.84 to be exact ) the oldest said "OK pay up uncle!" and the youngest said "I want to change my decision to a penny a day uncle!"

carlos and i said to them that we did this to prove a point, and the point was that trading dollars for hours, like at a job, will not make you rich.

you have to have your dollar go out and make more dollars for you
in order to get rich.

we then got them to think some more by telling them to exchange the pennies in the lesson to actual dollars. and change the "days" to years.

"that's a lot of money if it is in dollars!" is what they both said "but it wiull take 15 years to make just 327 dollars, we still need something to pay the bills before the time we are making the millions don't we?" we told them that yes, they do, and we do not have the answer. all we have is our experience that working at a job forever is not the answer to money problems.

i looked at carlos and he looked at me and i said that most people who enter the workforce and get jobs for their money are on a 45 year plan. this means that they will start working at about 20 years old, work at a job (or jobs) for 45 years and retire around 65. so, instead of thirty years like in the lesson, change it to 45 years and you are now on the same plan as most everyone else. but if you learn to have your money work for you, you will be rich... and far into money this planet does not even have yet.

that is the power of compounding.

if you don't want to be broke, you need to understand this lesson.

and they agreed that it was a good lesson on their first job.

by ryan ossevorth