I visited the Art Institute of Chicago this weekend, which is hosting a special exhibition on Monet and Chicago (link opens in new tab). What a treat to learn about the special connection Chicago has to Monet, and see his gorgeous peaceful paintings of water lilies, bridges, and light. Which got me to thinking about a brain teaser I once read about lily pads.
What can lily pads teach us about investing?
There’s a riddle about lily pads that can provide a great example of the value of compounding in investing.
Here’s the riddle: A pond has lily pads growing on it, and the lily pads double in size every day. After 30 days, the lily pad completely covers the pond. At what day do the lily pads cover half the pond?
“Day 15” is probably the most common and quickest response. But in fact, if the lily pad doubles in size daily, the day it covers half the pond must be Day 29.
This riddle is interesting because it’s an example of exponential growth, not linear growth. Linear growth is easy for our brains to understand: 1, 2, 3, 4. Exponential growth is harder to visualize, and so it’s harder to estimate accurately.
There’s a blog post here (link opens in new tab) that covers this in more detail.
Investing money can help it grow exponentially
The parallel between investing and the lily pad in the riddle above is the power of exponential growth.
Here’s a chart that illustrates the value of compound growth.
The orange striped section represents the compound investment growth that can occur over time, while the blue portion represents the money a person contributed. You can see that over 30 years, the size of the orange portion is significantly more than the blue portion.
This is an illustration only, and does not represent actual performance or investment advice. From this example, though, you can get an idea of how you can put time to work for your financial goals.
In the first few years, the orange investment return portion of the bars is virtually insignificant, and the blue contributions far outpace the investment return. As the years go by, however, the orange portion shows how the contributions have been able to grow over time due to compounding.
Start saving today for the future
This is why it’s so important to get started investing in your future retirement, today. Even if you don’t think you can afford to save now because your salary is low, your debt is high, etc., turn this idea around: you can’t afford NOT to start saving for retirement now.