The Miser Story: Magic of Compounding

This tale was first introduced to me in the 6th grade during a math lesson. I can’t remember all the details but I filled in the blanks. The concept behind this story has stayed in my mind all these years and I’m passing this story on to the young generations in hopes they’d be inspired.

The Miser

In a small town, there lived an old miser who got rich selling the plants and vegetables from his farmland. He also had farm animals to take care of and he decided to get two kids to do it for him while he went on a trip. Two teenagers, Tom and Jane, showed up for the job.

The Miser: “I need you two to take care of the animals for 30 days while I go on a trip. I’ll pay each of you $100 a day for this job.”
Jane: “Okay.”
Tom: “Hmm…

Tom takes a moment to think while the miser hurries him.

The Miser: “Hurry, yes or no?
Tom: “How about you pay me a penny for the first day and double it every day following that?”
The Miser (with a grin on his face):” If that is what you want, then okay.”

The miser thought it was foolish of the boy to offer to work for so little, therefore he accepted the offer without hesitation.

After 30 days, the miser returned from his trip and the two teens came to get paid. The miser starts calculating how much to pay.

The Miser: “One hundred times thirty is $3000. Jane, here is your money.”

Before the miser started punching the calculator, Tom stops him.

Tom: “You owe me $10,737,418.24.”
The Miser: “Foolish boy. That is IMPOSSIBLE!”

The miser frantically hits the buttons the calculator and his wide open eyes expresses his shock. He reluctantly pays Tom.

Tom: “I guess I’m not the foolish one here.”

THE END

During the math lesson, we were supposed to vote on who would have more money after 30 days after we did the math. If anyone is interested in the quick solution, here is the formula: $0.01 x (2^30)= $10,737,418.24.

To show you how powerful the magic of compounding is:

Exponential growth is the foundation of explosive increase of numbers and when applied to money, it is certainly a great path to wealth. In reality, the chance to double your money is quite rare. And, don’t even think about doing it 30 times. Achieving +100% increases in life seems impossible, but the +10% (from an average investment profit) or +3.5% (from an average high-yield online savings account) is much easier and more realistic to attain.

Lessons learned:

• You can start small. Tom started with a penny and ended with millions. Why can’t you? Don’t underestimate the value of a piggybank.
• The more you have to begin with, the faster it grows. Imagine if Tom started with a nickel. He would have ended with 5x more what he originally got. So keep on putting money into your savings accounts.
• Don’t act like the miser. Take some time to think. This doesn’t apply to just money but everything in life also. If it is too good to be true, then it often is.

On a final note, I hope this story has encouraged everybody to put their financial vehicles into good use and take advantage of this mathematical phenomenon.

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