Wednesday marks the 50th anniversary of “Mary Poppins,” in which, as IMDb puts it, “a magic nanny comes to work for a cold banker’s unhappy family.” The Disney film — based on the character created by Australian author P.L. Travers — takes place in 1910 in London. In one scene, Poppins encourages the Banks children to pay a woman a “tuppence” for bread crumbs to feed the birds (in the movie, Michael Banks is encouraged by his father and other bankers to instead invest his tuppence).
A reader asked us, in lieu of investing that 0.02 pounds in bird food, what if Michael had invested it in a savings account? What would the exponential wizardry of compound interest do for him if he went back to his account today?
Answer? Not much! I plugged the details of the question into Wolfram Alpha‘s compound interest calculator, and unsurprisingly Michael’s payoff heavily depends on the interest rate. Had he put 0.02 pounds in an account with 6 percent interest compounded quarterly for 104 years, his account balance would read only 9.79 pounds now, which is about $16.23. Not exactly making a mint here.
The limited return on Michael’s tuppence speaks to the hype that sometimes surrounds compound interest. The reality is that to exploit exponential growth, you can’t have a low initial investment, a low interest rate and a short period of time. At least one of those variables needs to be big to get that big payout.
So let’s look at this from another direction. Let’s say Michael decides to go into loansharking with his tuppence and manages to finagle a 15 percent interest rate instead of 6 percent. Well, 104 years later, he’s turned that 0.02 pounds into 87,990 pounds — a fantastic return.
Or tweaking another factor, let’s say Michael accidentally cryogenically freezes himself “Futurama” style and wakes up 500 years later, in 2410. The Bank of England would inform him that his account was sitting at roughly 171 billion pounds.
Compound interest is fun to think about, but it doesn’t have the magical properties many people think it does. For it to work, you need either a lot of money, a lot of time or a great rate.
Unless Michael has access to cryogenics or doesn’t have scruples about unethical loan practices, he should probably just go ahead and feed the birds.
A note: Disney is the corporate parent of FiveThirtyEight and ESPN.