Do You Understand Compound Interest?

The most powerful force in the universe is compound interest.
--- Albert Einstein

Would you rather get $10,000 today or a penny which doubles in value every day for 30 days?

Phil Harriman, former senator for Maine, asked this question earlier today in Banff.

Most of us would take the $10,000 today but after 30 days, the penny would grow to an astounding $5.4 million. We have trouble estimating exponential growth.

What about the effect of tax on the investment growth? With a tax rate of 35% (US federal and state), the $5.4 million drops to a miniscule $20,300. We have trouble estimating the effect of tax.

"What If"
Static examples are interesting, but what happens if the assumptions change? We can't easily estimate the outcome. Rather than guess, find out using the calculator I created with InstaCalc (a very nifty tool for bloggers and websites).



Deja Vu?
Avid readers with excellent memories may recall my earlier post on compounding, which gave more explanation of the calculations.

Links

• $1,000,000 after taxes on investment growth

Rewarding Bad Customers

How strange. A customer returning an item is treated better than a customer buying.

As children grow up, they become more particular about clothing. In this case shoes. The preferred brand was Nike and now Adidas.

The US offers more selection and better prices than Canada. So during our recent trip, shoe shopping was on the agenda. Our son needed a new pair of running shoes. The same style in a larger size. Alas, we could not find what Jeevan wanted. We visit store after store, encouraging him to try different brands and styles. No luck. He could tell what would be comfortable by just looking. Try on the shoes, we implored. He would but would repeat his initial observation. The power of preconceived ideas.

On our way back to Canada, we stop at a multibrand shoe store (MSS). No success. So we head to a Nike store a few doors away and leave with a pair of shoes. Once we're out of the store, our son says he prefers the shoes we saw in the MSS. Choking a child is probably a criminal offense and there are potential witnesses. So we go back to the MSS and there our son finally finds a pair that he likes --- a pair that looks similar to his old shoes. So I head back to Nike to return the shoes bought minutes earlier. Guess what happened?

The Surprise
When you buy shoes, the cashier checks that you have a matching pair. Since our left and right feet are different sizes, we'd be better served if each shoe was a different size but stores don't sell them that way.

The return line was shorter than the two lines for buyers. The rep didn't open the shoe box to see what was inside. I got an instant refund and --- here's the surprise --- a 20% discount on another purchase within the next two hours. This is called ReturnRewards. How strange.