The Power of One Dollar
“Compound interest is the eighth wonder of the world. He who understands it, earns it: he who doesn’t, pays it.” Albert Einstein
What’s the power of a dollar? In terms of consumption, you can’t get much. In terms of investing, the power of a dollar is significant, especially for younger investors. Teenagers applying to summer jobs and college grads landing their first opportunities are the luckiest group of investors around and have the ability for a handful of dollars to completely alter their financial future.
What’s the force that makes a dollar so powerful? It’s the principle of compounding — where your initial dollar earns a bit of extra money, and then that initial dollar plus that extra bit of money earns a bit more extra money. It’s like a sticky spring-time snowball rolling down a mountain. With every rotation, the snowball picks up a bit more snow, getting bigger and bigger. The taller the mountain, the larger the snowball has the opportunity to grow. Young kids and adults are standing on a MASSIVE mountain from which to launch their snowball. The view from the top is bright!
Let’s take a look at the numbers. The 500 largest companies in the United States have grown significantly over time, returning to their owners, on average, just below 10% per year. The good news, as citizens of the world, everyone has the ability to own a piece of these awesome companies — names like Amazon, Microsoft, Apple — essentially for free, and with very little effort. In return for buying a portion of these companies, you become part of an elite ownership group and partake in their growth. The longer you stay in this ownership group, the larger your dollar grows.
Let’s take an example of a 15-year-old getting a summer job at the local ice cream shop. If this young investor can save just one dollar from her earnings and invest in these 500 large companies (she’s now in the ownership group!), that one dollar has the opportunity to grow into $156 when she is sixty-eight approaching retirement. If she saves and buys ten dollars’ worth of ownership in these companies, she’ll have $1,526; if she buys one hundred dollars’ worth, she’ll have $15,260, etc. Keep in mind, this is without purchasing one more dollar of ownership from her earnings. If this hypothetical investor is 20 years old, the prospects are also incredibly bright with one dollar growing to $97 at age sixty-eight. As shown below, the older this investor is, the shorter the mountain for growing her snowball. Time is very valuable!
The two most important actions this young investor takes are 1) her decision to set one dollar aside, forgoing consumption today for the opportunity of potentially greater consumption in the future, and 2) using her dollar to buy entry into this ownership group invested in America’s future productivity and growth. By taking these two actions and maintaining them into the future, this young individual guarantees herself far greater financial success.
The above example shows that when the time between current age and future age is greater, the result of compounding is more powerful. However, the two actions taken — 1) forgoing consumption with current dollars and 2) becoming an owner in America’s future — are the two most important decisions individuals of any age can make to improve their financial future.
The strength and innovation of America gets me excited. The opportunity for everyday people like myself to partake in this growth and benefit from others’ brilliance, hard work, and creativity seems almost too good to be true. I’ll ride the coattails of America’s best every day. I hope you join me.
