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George Washington's Birthday
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THE SCENARIO
Today is the birthday of America's first president, George Washington. Happy birthday, George! He may have died 220 years ago, but he appears on our $1 bills even today.
Back when he was born, in 1732, the British pound was being used as currency in the UK, and that's true even today, so we'll use that currency for this example - the math works the same regardless of the currency we talk about.
So let's say that on the day of George's birth, his parents (then subjects of the British crown)
sold an ounce of gold for £4.25, and then proceeded to invest it at a modest 5% annual return ever since.
The question: How many pounds would that investment be worth today? Bonus points for converting that to dollars and comparing the end result to the value of an ounce of gold today.
THE SOLUTION
This one is pretty straightforward.
The only thing we need to know is how much time has passed. 2019 - 1732 = 287 years. 287 years = 287 x 12 = 3,444 months.
First things first, make sure the calculator is using 12 Payments per Year.
N: 3,444
I/YR: 5 (The money has made 5% since George was born)
PV: -4.25 (The original £4.25 was invested)
PMT: 0 (The investment hasn't seen additional contributions or withdrawals since it was made)
FV: (This is what I'm trying to find)
That investment, starting from one ounce of gold, would be worth £7,039,909.94 today.
The conversion rate today is
£1 = $1.30, so the investment would be worth $9,151,882.92 today.
The price of gold today is
$1,326.78 per ounce. So if the Washingtons had saved the ounce of gold, it be worth $1,327 today. If they had sold the gold and invested the money, that would be worth almost 7,000 times as much. Sounds like selling the gold and investing the proceeds with compounding returns was a pretty good idea!
Compounding interest can be pretty potent, particularly over long periods of time. (For giggles, try figuring out the value of that money if the return had been 10%/year instead of 5%.)
What do you think? Are there problems with this sort of imagining? If so, what are they? And in what way the choices you make today be informed by different or better thought experiments? Let us know in the comments!
