February 6, 2023
Forefront‘s Monday Market Update
The Power of a Penny
Financial education is something that I am passionate about. I will forever be grateful for my high school education because it set me up for success in college. The problem was that it didn’t do much to set me up for success in everyday life. For example, I never learned about compounding interest or the dangers of credit cards and high-interest-rate debt. We discussed the concepts of balance sheets and profit and loss statements for companies during Economics class, but we never discussed those concepts for us as individuals. Budgeting, spending strategies, and education would have gone a long way to keeping me away from credit card lenders filling my college mailbox with pre-approved applications.
My experience has led me to push hard for financial literacy and education training in high school, so I set up classes in local high schools for senior students and their parents for a course in financial literacy. I wish ALL schools would be open to this idea and embrace the good we are trying to put out in the community, but even some administrators still don’t see the benefit of this type of education. I met one of those administrators last week as I tried to expand the school districts in that I offered the course.
Financial Literacy for Everyone, Including Adults
As I sat with this school admin and discussed why I felt my course was necessary, he asked me what I thought I could teach 17 and 18 yrs. old students?
Instead of simply telling him, I decided to show him. So, I asked this highly accomplished professional a simple question, would you rather have $10,000 a day for 30 days or a magical penny that doubles in value every day for 30 days? His answer, he wanted the $10,000 per day, and he was wrong.
The Power of a Wrong Answer
$10,000 daily for 30 days straight gives you $300,000 at the end. That is linear growth, like your salary at work. But, on the other hand, the penny doesn’t grow linearly; it grows exponentially. So let’s look at the performance of our magical penny over the first ten days.
DAY 1: $0.01
DAY 2: $0.02
DAY 3: $0.04
DAY 4: $0.08
DAY 5: $0.16
DAY 6: $0.32
DAY 7: $0.64
DAY 8: $1.28
DAY 9: $2.56
DAY 10: $5.12
After ten days, with linear growth, you would have $100K in the bank, while your penny was worth $5 bucks. So, again, not the best start, but let’s look at days 11-20.
DAY 11: $10.24
DAY 12: $20.48
DAY 13: $40.96
DAY 14: $81.92
DAY 15: $163.84
DAY 16: $327.68
DAY 17: $655.36
DAY 18: $1,310.72
DAY 19: $2,621.44
DAY 20: $5,242.88
After twenty days, you would either have $200K in the bank or a little more than $5K. Looking like this is going to be a blowout for linear growth vs. exponential. That starts to change come day 26.
DAY 21: $10,485.76
DAY 22: $20,971.52
DAY 23: $41,943.04
DAY 24: $83,886.08
DAY 25: $167,772.16
DAY 26: $335,544.32
How did we get here? On day 26, the penny would be worth more than you earned all month from the first option.
DAY 27: $671,088.64
DAY 28: $1,342,177.28
DAY 29: $2,684,354.56
DAY 30: $5,368,709.12
94% of the growth occurs in the last four days. I saw his eyes widen as I got to the previous four days. Of course, there is no magic penny that will double every day for 30 days, but the story helped to show the concept and, more importantly, the power of compounding.
Compounding and Teenagers
Compounding is certainly powerful when it comes to money, so starting early is more important than how much you start with. However, it is also powerful in other areas of our lives.
Health issues start to compound as we age. For example, you won’t go from eating fast food once to having a heart attack in the parking lot but eat that fast food daily, and the compounding effects of an unhealthy lifestyle start off slow and then can kill you suddenly.
Kindness and working hard compound over time. A smile and some kind words will make you feel good inside, but it could be the last compounding piece to turn the recipient’s day, week, or year around. Hard work and grit compound to move you closer and closer to your end goals. You don’t go into medicine and cure cancer on your first day in a classroom.
I could have given ten more examples, but the lesson is easy for us all to see, the best time to start was yesterday, but the second-best time to start is right now. And start can be anything you want, losing weight, building wealth, or training to run a marathon; the choice is yours, but the impact and effects of compounding hold for everything.
So What?
If you read these posts each week, you know I always include a couple of bullet points for how what I have written about impacts you. Today I am dedicating a paragraph to it because of how important this concept is for everyone in all stages of life.
Start today if you have children but feel guilty that you haven’t started saving for college. Start with $50 a month; it doesn’t matter; what matters is getting started. Compounding can’t do its thing for the money, and your savings habit, unless you get started.
| MONDAY, FEB. 6 | |
| None scheduled | |
| TUESDAY, FEB. 7 | |
| 8:30 AM | International trade deficit |
| 12:40 PM | Fed Chair Jerome Powell speaks at Economic Club of Washington |
| 2:00 PM | Fed Vice Chair Michael Barr speaks |
| 3:00 PM | Consumer credit |
| WEDNESDAY, FEB. 8 | |
| 9:15 AM | New York Fed President John Williams speaks |
| 9:30 AM | Fed Gov. Lisa Cook speaks |
| 10:00 AM | Wholesale inventories (revision) |
| 10:00 AM | Fed Vice Chair Michael Barr and Atlanta Fed President Raphael Bostic speak |
| 12:30 AM | Minneapolis Fed President Neel Kashkari speaks |
| 1:45 PM | Fed Gov. Christopher Waller speaks |
| THURSDAY, FEB. 9 | |
| 8:30 AM | Initial jobless claims |
| 8:30 AM | Continuing jobless claims |
| FRIDAY, FEB. 10 | |
| 10:00 AM | UMich consumer sentiment index (early) |
| 10:00 AM | UMich 1-year inflation expectations (early) |
| 10:00 AM | UMich 5-year inflation expectations (early) |
| 12:30 PM | Fed Gov. Christopher Waller speaks |
| 2:00 PM | Federal budget balance |
| 4:00 PM | Philadelphia Fed President Patrick Harker speaks |
Most anticipated earnings for this week:
About Amit: I am a first generation American, the son of a working-class Indian family, and I lived through my parents’ struggle to find their place in this country, to put down roots that would sustain them as well as their children in a new land. As they encouraged me to excel in school and fostered my hobbies and interests, I was keenly aware of the dynamic between them. I understood that there was a difference between where they came from individually and where we were now. They worked hard in their individual capacities, but they weren’t always on the same page about financial issues – and that can make or break a family’s future. I didn’t know it at the time, but this laid the groundwork for my passion towards financial services and helping families succeed.