What Ben Franklin Can Teach You About the Power of Compound Interest

Benjamin Franklin, one of our founding fathers, was a very savvy guy. He said that a penny saved is a penny earned, but he proved that it really can be worth millions. In his will, Franklin left the cities of Boston and Philadelphia 1,000 pounds each (the equivalent of $4,444). He asked that the funds gather interest over the next 200 years and also be used for loans to young craftsmen to help them get established in their trades.

Most of us don’t have 200 years to make our money grow, but if we are investing for long-term goals, diligent saving and compounding can really make a difference.

To measure your progress you can use the Rule of 72. Divide 72 by the rate you are earning on your money to determine how long it takes your money to double. (Use the Rule of 115 to measure how long your money will take to triple). For example, if your money earns 3% a year, it will take 24 years for your money to double, and 38 years for it to triple. But if you invest your money in growth investments that average 8% a year, your money will double in only nine years. And your money keeps doubling. A $10,000 investment earning 8% will grow to $20,000 in nine years, and nine years later you’ll have $40,000, then $80,000, then $160,000. Money left to grow over years and years can be your ticket to a lifetime of financial security.

This is why saving money for your retirement early is so crucial. The more time you give your money to grow, the more it will earn and those earnings will also grow. If you keep telling yourself that you’ll start saving for retirement next year, you’re stealing money out of your own pocket.

In Ben Franklin’s case, compounding paid off for both cities. Philadelphia took to heart Franklin’s wish that the money be loaned to individuals, and over the 200-year life of the trust loaned funds to hundreds of individuals at low-interest rates. Boston focused on the long-term return on the money, and invested the bulk of the money in a trust fund, compounding the earnings.

By 1993, over $2.25 million had accumulated in Franklin’s Philadelphia trust. Franklin’s Boston trust fund, which had focused on getting high returns, had grown to almost $5 million, more than twice the amount in the Philadelphia trust fund.

Boston ultimately used the money to fund the Franklin Institute of Boston, while Philadelphia’s funds are now used to assist recent graduates of Philadelphia high schools who wish to pursue careers in trades, crafts, and applied sciences.

Ben Franklin’s saying about a penny saved is well-known, but by his legacy he proved the worth of another of his lesser-known sayings: “The use of money is all the advantage there is in having it.”

Follow in Ben Franklin’s footsteps. Our articles about saving and investing for women can help you get your financial life on track. Sometimes all it takes to develop good money habits is a little knowledge and support. If that’s what you need consider joining or creating a Money Club in your area.

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