Recently, I heard from Mimi K. in Mississippi, who wanted to know of a way to teach her children about the principle of compounding interest. Her question reminded me of a story I learned from my colleague Alvin Danenberg that takes a nebulous financial theory and turns it into an easily understood principle:
In 1492, Christopher Columbus decided he was going to save for retirement. He had one penny, and he knew he could earn 6 percent every year on his money. He put the penny in his left pocket and placed the interest ($0.01 x 6 percent = $0.0006) into his right pocket for safekeeping. He never added anything to his original penny in his left pocket, yet the interest accumulated year after year in his right pocket.
