Would you take a million pounds now or let 1p double every day for a month?

A million pounds in the hand now sounds like a no-brainer deal to take. But the incredible power of compound interest should never be underestimated.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Stacks of coins

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

If a very kind stranger offered you the choice of a million pounds today, or 1p doubled every day for a month, which would you choose?

I’m sure many people would take the £1m, and I can’t blame them. After all, that’s the sort of money that could fund a luxury round-the-world holiday. And there might still be enough money left over for a single Class A share of Berkshire Hathaway, which currently stands at $537,780!

But would taking immediate millionaire status really be the best option? Or would the delayed gratification route ultimately prove more enriching? Let’s find out.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

Wheat on a chessboard

First, I should note this mathematical exercise has been formulated in different ways for many centuries. Probably the most well-known involves wheat on a chessboard.

This is how Wikipedia expresses it in textual form: “If a chessboard were to have wheat placed upon each square such that one grain were placed on the first square, two on the second, four on the third, and so on (doubling the number of grains on each subsequent square), how many grains of wheat would be on the chessboard at the finish?

The answer is 18,446,744,073,709,551,615 grains of wheat. Wow!

However, many readers will be aware that a chess board has more than double the amount of squares (64) than a month has in days. So how would much would 1p doubled over 31 days be? Here are the calculations.

DayAmount
1£0.01
2£0.02
3£0.04
4£0.08
5£0.16
6£0.32
7£0.64
8£1.28
9£2.56
10£5.12
11£10.24
12£20.48
13£40.96
14£81.92
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
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
29£2,684,354.56
30£5,368,709.12
31£10,737,418.24

The final figure after 31 days of doubling is £10.7m!

With the benefit of hindsight, then, you’d be kicking yourself if you’d snapped up the initial £1m on offer.

Using compound interest to build wealth

Unfortunately, it’s not realistic to expect my money to double every day (or even year). But the good news is that it doesn’t have to in order to reach a substantial sum. Indeed, countless people have generated huge wealth at far lower annual rates of return than 100%.

Billionaire Jim Simons, the founder of quantitative hedge fund Renaissance Technologies, compounded money at 66% annually between 1988 and 2018. That is thought to be the greatest investment record on Wall Street.

Warren Buffett‘s long-term average annual return is just under 20% per year. Yet he is among the wealthiest investors alive because he has been compounding such returns since the 1950s. As we saw with the chess board example, the difference between 31 and 64 can be mind-blowingly enormous.

What this means is that the power of compounding returns can boost my wealth significantly over long periods of time. And that’s even with quite modest sums of money. For example, £500 invested every month with an average return of 10% per year would grow to £1m in 30 years.

Given enough time then, compounding can transform regular small amounts of money into a life-changing sum. But the sooner this process begins, the more wealth I can potentially generate.

However, don’t buy any shares just yet

Because my colleague Mark Rogers – The Motley Fool UK’s Director of Investing – has released this special report.

It’s called ‘5 Stocks for Trying to Build Wealth After 50’.

And it’s yours, free.

Of course, the decade ahead looks hazardous. What with inflation recently hitting 40-year highs, a ‘cost of living crisis’ and threat of a new Cold War, knowing where to invest has never been trickier.

And yet, despite the UK stock market recently hitting a new all-time high, Mark and his team think many shares still trade at a substantial discount, offering savvy investors plenty of potential opportunities to strike.

That’s why now could be an ideal time to secure this valuable investment research.

Mark’s ‘Foolish’ analysts have scoured the markets low and high.

This special report reveals 5 of his favourite long-term ‘Buys’.

Please, don’t make any big decisions before seeing them.

Secure your FREE copy

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Two employees sat at desk welcoming customer to a Tesla car showroom
Investing Articles

Could Tesla stock be a brilliant bargain in plain sight?

Christopher Ruane sees some things to like about Tesla, but as its vehicle revenues have gone into sharp decline, is…

Read more »

British coins and bank notes scattered on a surface
Investing Articles

3 cheap FTSE 250 stocks with big dividends to consider buying right now

The FTSE 250's loaded with so many big dividend yields it's hard to know where to start. These three have…

Read more »

Rolls-Royce's Pearl 10X engine series
Investing Articles

Up 585%, could Rolls-Royce shares still go higher?

Christopher Ruane likes the Rolls-Royce business but is not so convinced by the value its current share price offers him.…

Read more »

Silhouette of a bull standing on top of a landscape with the sun setting behind it
Investing Articles

I reckon a bull market’s coming! Here’s what I’m buying for my Stocks and Shares ISA

Hoping to capitalise on what he believes is an undervalued UK stock market, our writer’s added more of this FTSE…

Read more »

piggy bank, searching with binoculars
Investing Articles

The UK stock market looks undervalued to me. Here’s 1 growth stock to consider for a SIPP

Our writer explains why he thinks the UK stock market’s currently in bargain territory, and identifies one share potentially worthy…

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

Meet the FTSE 100 stock I’ve been buying this week

Despite a strong week for the FTSE 100, one stock fell 7% in a day. And Stephen Wright took the…

Read more »

Businesswoman calculating finances in an office
Investing Articles

1 of my favourite growth stocks crashed 20% in a day this week. Here’s what I’m doing

Stephen Wright thinks the market’s overreacting to short-term growth challenges in one of his favourite UK stocks, creating a buying…

Read more »

Young female hand showing five fingers.
Investing Articles

Here’s a 5-stock high-yielding portfolio that could generate passive income of £1,500 a year

Those wanting to earn generous levels of passive income from their Stocks and Shares ISA could take a closer look…

Read more »