Interesting...very interesting!

Call me sad - you won't be the first - but the most mind-blowing statistic I've read in a very long time was in a recent issue of The Economist. To make matters worse, the stat in question related to the exciting topic of…compound interest!

Please do hear me out though, because I confidently predict that you'll be as gob-smacked as I was.


To kick things off I’ll quote directly from The Economist article (weirdly it was on the subject of climate change, but that’s by the by):

‘At a modest 2% rate…a single cent rendered unto Caesar in Jesus’s time is the equivalent of about $1.5 quadrillion (or about 30 times the value of the entire world economy today)’

Probably easiest if I say this for all of us…wow!

If you thought I was slightly sad to be so excited by a random stat like that, then you’re going to feel even more sorry for me when I tell you what I did next – I picked up my calculator and started doing some sums. And the more numbers I tapped in the more amazed I became. Here are just some of the weird and wonderful things I found as I investigated the mind-blowing effects of compound interest over very long periods of time:

1066 and all that

It’s not that rare to hear of people in the UK claiming to be able to trace their ancestry back to the time of William The Conqueror. So to make things a little more fun I decided to start this exercise in 1066 rather than in the time of Caesar. But having denied ourselves more than a thousand years of interest growth I think it’s only fair that we use 3% per annum rather than 2% – to be fair still a very modest interest rate.

Of course this is all entirely hypothetical (sadly given the results below). But the one thing that every single person in the world today has in common is hundreds, more likely thousands, of ancestors who were alive a thousand years ago (a very interesting exercise in itself, but that’s for another day). So at least we can allow ourselves to dream about what would have happened if just one of them had, in 1066, had the very bright idea of tucking away a single penny as a nest egg, to be untouched over the ensuing generations, for your enjoyment in 2010.



The numbers

- By way of context, at a rate of 3% per annum, a saver will double their money approximately every 23.5 years if they allow the interest to roll up.

- In our example, this means that the initial penny would have turned into just over £1 by the year 1230 when Henry III was on the British throne. Not a big sum after more than 130 years of growth, but we all know the saying about little acorns...

- By 1395, when Richard II was on the throne one penny would have grown into a more impressive £100 – a more than worthwhile sum of money in those days.





- By 1466, during the Wars of the Roses, the penny would have grown into £1000. Now we’re talking serious wealth in the context of the times.

- By 1700, with William of Orange on the British throne, this single penny saved at 3% compound interest would be worth well in excess of £1m! A millionaire in that era would undoubtedly be one of the wealthiest individuals, not just in Britain, but in the entire World.

- Billionaire status would have arrived sometime in the 20th Century, between the 1st and 2nd World Wars. Without doubt the holder of this savings account would have been the world’s richest individual at that time.

- As to the future, trillionaire status would be expected to arrive sometime in the second half of next century.


And my point is?

These remarkable numbers, hypothetical and just a bit of fun though they are, do help bring to life the extraordinary power of rolling up interest over time. And if you were wondering how much interest a penny invested in 1066 would have generated by 2010 had the annual interest been taken out each year rather than rolled up, it would have amounted to a princely…28 pence!!)

For anyone who has children and wants to teach them one of the most valuable lessons they’ll ever learn in life (at a time when they’re young enough to reap at least some of the benefits), could do a lot worse than show them the above figures in order to start getting them excited about what compound interest can do for them. They might even learn a bit of history at the same time.

Now whatever happened to that penny I dropped down the back of the sofa earlier…?