The miracle of compound interest

Here is an interesting way to look at compound interest.
Source: MSNMoney

This is a concept best illustrated by example. Let's say I give you a penny today, and promise to double the amount every day for a full month. How much money would I be giving you on the 31st day?

The answer: $10.7 million. Check it out:

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
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
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
Day 27 $671,088.64
Day 28 $1,342,177.28
Day 29 $2,684,354.56
Day 30 $5,368,709.12
Day 31 $10,737,418.24

Each day, the "interest" I paid you the previous day earns more interest. At the beginning, the amounts are nominal, but by the end we're talking big bucks.

Of course, no one's going to double your money every day. But this concept explains how people who save relatively small amounts over the years can build rather substantial nest eggs. After a few decades, their actual contributions represent only a small part of their burgeoning wealth -- it's mostly their returns that are earning returns.

But this also illustrates how debts can quickly balloon out of control. If you're paying interest, rather than incurring it, and you're not diligent about paying off the finance charges in full every month, the unpaid amount will incur additional interest charges, increasing the total amount that you owe. This is why so many families who incur credit card debt eventually find themselves in trouble as the amounts they owe explode past their ability to pay.

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