“Hey mister, can I mow your lawn for you?”
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Harry Simms looked at the young 12 year old Matthew in front of him. Behind him was a shiny new lawnmower. “Can I mow your lawns, Mr Simms?” asked Matthew.
Simms was the wealthiest man in town, a millionaire many times over. “Sure, kid,” he said. “You can mow my lawn. It’s a pretty big lawn though. How much do you want me to pay you?” “One cent” replied the kid. “One cent!” laughed Simms. “You’re not going to make much money at that rate. I’m happy to pay you twenty bucks.” “No,” said Matthew. “All I want is one cent. But I want a long term contract and a raise every week.”
“Hmmm.” Simms reflected on this and then said “How much of a raise do you want and how long a contract?” He started to frown, thinking that the kid might have some huge rise like $20 per week in mind. “Mister, I want you to double my pay every week. This week just 1 cent, then next week 2 cents. The third week 4 cents, then 8 cents, then 16 cents, then 32 cents and so on. I’ll mow your lawn every week from now until the end of summer, which is 14 weeks in all and then again next year when we can pick up where the amount was when this summer ends.
Okay?” Simms had a head for business, but was no mathematician. “That sounds pretty cheap,” he said, thinking to himself that it would probably come to perhaps a couple of hundred. “It’s a deal.”
Matthew pulled some papers from his pocket. “Can you sign this paper, mister?” he asked. It was a contract written up in coloured ink. The script looked childish, but was quite clear, outlining the weekly doubling of payment and term of the contract. “You’ve been watching too many lawyer shows on television!” chuckled Simms as he signed.
By the 12th week Matthew was paid $20.48, which Simms was very happy about since he had wanted to pay him that every week anyway. By the 14th and last week of summer, Simms handed the kid $81.92 saying, “You know, kid, you’re smarter than you look.” “See you next year, Mr. Simms!” Matthew said as he walked away.
Then it hit him. The wealthiest man in town turned green. “What is he going to end up with by the end of next summer?” Take a guess. By the end of next summer (another 14 weeks), how much will Matthew have made all together? Is it going to be about
(a) $163.8
(b) 473,000
(b) $628,000
(c) $1.3 million or
(d) $2.1 million.
I’ll let you figure it out for yourselves.
The moral of the story is of course that compound interest and leaving investments to run their course are powerful forces and that they may appear to be small at the start, but they build surprisingly quickly towards maturity.
By: Paul Watkins