by Tim McMahon
It’s the investor’s dream… going back in time… investing a few thousand dollars and letting it compound over a long period of time and returning a multi-millionaire.
If you invested a couple of thousand dollars in the 1780’s, what would the effects of compound interest over the next two hundred years really be?
Can it really create millions from a few dollars?
Well that is exactly what Benjamin Franklin did. Over his life Franklin had amassed a good deal of savings (after all he was the author of the quote “a penny saved is a penny earned”). He also spent a brief time as President of Pennsylvania where he was paid £2,000. Franklin felt bad about taking the pay (he felt officials should work out of altruism not for the pay).
Although Franklin left the majority of his estate to his daughter “Sally” he did leave a portion to various charities including ones for libraries in Philadelphia and Boston. But in addition Franklin added a codicil to his original will that specified that an additional £1000 be left to each of those two cities to help apprentices start their own businesses. He had a soft spot in his heart for struggling apprentices because he had been one and he also wanted to repay the £2,000.
The interesting thing about this bequest is that the apprentices were to repay it at the rate of 5% interest plus 10% of the principle for a period of ten years. The interest and principle were then to be loaned out to other apprentices for a period of 100 years. (How’s that for thinking ahead?) Franklin calculated that by that time his fund would have grown to £131,000 and the cities would be free to use £100,000 of it for public works projects. Franklin further stipulated that the remaining £31,000 would continue to be loaned and to grow for another 100 years at which time Franklin said it could all be added to the public treasury.
By Franklin’s calculations the £31,000 should have grown to £4 million in the second 100 years.
So how did Boston do? After 100 years Franklin’s £1,000. had grown to a little under $400,000. which because of currency fluctuations was not quite the £131,000 he had hoped for but still quite a bit of growth for £1,000. His investment for the second 100 years grew to almost $5 Million dollars. Once again not quite £4 Million pounds but not bad considering that Franklin entrusted the management of his fund to non-professional volunteers rather than paid professionals. (Once again the skin-flint that he was, he didn’t want any of his funds going to pay salaries.) Which may have been wise since it eliminated the chance of corrupt managers looting the fund.
Franklin also included strict instructions on how the money was to be handled and the necessity for co-signers for the loan, the maximum size of each loan, down to the minutest detail including how the records were to be maintained.
So you would think that both cities should end with approximately the same amount of money but… that is not the case. Philadelphia did considerably worse than Boston. After 100 years the £1,000 fund in Philadelphia had grown to $172,000 or only about one quarter what Franklin had projected it should be. And after another 100 years in 1990 the fund was worth $2.3 million. Once again less than half of the amount Boston amassed.
Lessons from Franklin’s Investments
There are several lessons we can learn from this true life example. First, compound interest really does work if you have long enough… even if you can only invest at 5% typically the stock market has returned about 10% over long periods of time. Better rates will make a huge difference. Getting 10% will make you much more than double what 5% will.
The second lesson from Franklin’s bequest is that it also makes a big difference who invests your money. In this case, Boston earned more than twice what Philadelphia earned.
See Also:
- Compound Interest Calculator
- Millionaire Calculator
- The Five Key Investment Criteria
- Retirement Planning Calculator
