NH Personal Finance Articles: Ben Franklin and the Legacy of Compound Interest.

NH Personal Finance Articles: Ben Franklin & the Legacy of Compound Interest

 



Ben Franklin
and the Legacy of Compound Interest

by Therese Reger

Even Ben Franklin might be surprised were he to learn what became of his generous bequest to two beloved cities, Boston and Philadelphia. To us, it's another piece of Franklin's wisdom, to be added to the already bulging store of aphorisms contained in Poor Richard's Almanack.

In his will, Franklin wrote:

"The said sum of one thousand pounds sterling, if accepted by the inhabitants of the town of Boston, shall be managed under the direction of [various churches] who are to let out the sum upon interest, at five per cent, per annum, to such young married artificers, under the age of twenty-five years, as have served an apprenticeship in the said town. And in order to serve as many as possible in their turn, as well as to make the repayment of the principal borrowed more easy, each borrower shall be obliged to pay, with the yearly interest, one tenth part of the principal and interest, so paid in, shall be again let out to fresh borrowers."

He left an equal amount to the city of Philadelphia.

Some 200 years after his death on April 17, 1790, the 1,000 pounds (worth $4,400 at the time) had grown to $6.5 million. The NY Times reported Boston's fund had swelled to $4.4 million; Philadelphia's to $2 million.

Analysts say the difference was in each city's approach to the legacy. Boston tried to minimize risk, while Philadelphia emphasized Franklin's instructions to loan money to individuals.

In addition to the focus on saving, Boston was the beneficiary of compound interest. Here is where time pairs with mathematics to produce a truly remarkable result: $1 invested with interest compounded annually would yield $131.50 in interest income after 100 years, and $17,292.58 after 200 years. (See the www.moneychimp.com interest calculator.)

So what would Poor Richard have said about this phenomena? After all, he had words of wisdom on many subjects, even extending to today's mantra to fitness freaks, No pain, and no gain. (For the complete catalog of his sage advice, click on www.sacklunch.net/poorrichard.)

Well, to the good citizens of Philadelphia, he might have said: A penny saved is a penny earned!

And to Boston: A word to the wise is enough.

Man of few words, was Ben. Wisdom, compounded.

 

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