If you were given a choice, what would you pick — P1 Million today or one centavo that doubles every day for the next 30 days?
I’ll give you a second to think about it.
There’s no wrong answer because either way you would end up being a millionaire. However, if you chose the one centavo, pat yourself on the back because you would have earned P5.3 Million in 30 days. Don’t believe me? Just look at the table below.
This is due to a concept known as compounding interest. A million pesos may sound enticing especially to those who would want to have the money today. While doubling your money is a very attractive offer, explaining the concept of compounding interest to a vast majority is not as exciting as getting a huge amount outright. Most people think of time as their enemy and not their friend when it comes to investments. If you understand compounding interest, you would know that regularly investing small amounts will yield to higher returns in the long run.
Investments are market driven. They fluctuate especially in the short term but are likely to go up as businesses do well and the economy improves. The choice between P1 Million and one centavo are subjective depending on the need of the person being asked. Hopefully, by understanding this concept, you will learn to identify which option is better for you.
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