How Ben Franklin Built a Financial Empire – and You Can, Too

Why Compounding is Your Single Greatest Financial Ally – If You Give It Time

By Ron A. Rhoades, JD, CFP® and Chris Brown, Ph.D., CFP®

In 1789, Benjamin Franklin gave £1,000 each to the cities of Boston and Philadelphia[1] But there was a catch: the money was to be loaned at 5% interest to young men who had served apprenticeship in the city and wanted to start their own businesses – loans from which Franklin himself had benefited as a young printer.[2] After 100 years, the cities could use 75% of the fund’s balance on a public project decided by their citizens, and after 200 years, the remaining principal and accumulated interest would be disbursed.[3]

Though Franklin’s scheme is often viewed as an early example of small-business lending, Franklin also understood that at 5% interest over 100 to 200 years, the £1,000 would grow into a considerable investment in public works for each city.[4] He was using a concept called compound interest – something he advocated for since the 1740s: “Money makes money. And the money that makes money, makes more money.”[5]

So, what did Franklin’s money do for Boston and Philadelphia?

The immediate impact was that many entrepreneurs received seed money in trades such as carpentry, baking, coopering, tailoring, painting, printing, and blacksmithing.[6] Over time, the trusts in both cities grew substantially; by the 200-year term, the funds were worth about $2 million in Philadelphia and $4.5 million in Boston.[7] Ultimately, the trusts supported educational and public-serving institutions consistent with Franklin’s philanthropic purposes.[8]

Franklin’s Gift: An Evidence-Backed Way to Wealth

Franklin’s larger lesson was not merely civic generosity, but the demonstration that compounding can be a powerful long-term wealth-building force.[9] It does not require market timing, stock picking, or advanced credentials. It requires a reasonable rate of return and a long stretch of patient time.

What Compounding Actually Is

Compounding is the process by which the returns earned on an investment begin earning returns themselves.[10] A $1,000 investment earning 10% a year does not grow by $100 every year; it grows by $100 in year one, $110 in year two, and $121 in year three.[11] The growth curve is not a straight line; it is exponential and becomes much steeper with time.[10]

Consider a single $7,000 contribution to a Roth IRA at age 25, earning a 10% average annual return, with values calculated purely from the compound-interest formula:[11]

  • At age 35: about $18,150.
  • At age 45: about $47,070.
  • At age 55: about $122,071.
  • At age 65: about $316,599.
  • At age 75: about $821,036.

That is one $7,000 contribution, no additional savings, and no active trading.[11] In this illustration, the dollar gain in the last ten years exceeds the gain in the first thirty years combined, which demonstrates how compounding does much of its work near the end of the time horizon.[11]

“Compound interest is not magic. It is patience compounded.”

A Tale of Two Savers

A common classroom illustration compares two hypothetical savers.[11] Jane invests $5,000 a year from age 25 to age 35 and then stops contributing.[11] John waits until age 35 but contributes $5,000 a year every year until age 65.[11] Assuming a 10% average annual return, Jane ends with about $1,529,000, while John ends with about $905,000.[11] Jane contributed only $50,000 total, while John contributed $150,000 total, yet Jane still comes out ahead because the earliest years of compounding matter most.[11]

The same logic applies to early Roth IRA funding for young workers.[11] In the article’s illustration, two $2,000 Roth IRA contributions made during teenage summer-job years, for a total of $4,000, grow to more than $241,000 by retirement if allowed to compound tax-free to age 59½, and to more than $313,000 by age 65 under the same assumptions.[11]

The Inflation Caveat

Nominal returns can overstate the real-world result because they do not reflect inflation.[12] Inflation-adjusted, or real, returns better measure future purchasing power.[12] If long-term inflation is 2.5% and all-in fees and costs are 0.10%, a 10% nominal return becomes a 7.4% real return by subtraction.[11]

Using that 7.4% real-return assumption, the same $7,000-at-age-25 example becomes about $121,694 at age 65 and about $248,492 at age 75 in today’s purchasing power.[11] Lower-cost funds have historically had a greater likelihood of outperforming higher-cost funds because they subtract less from returns over time.[13]

Using Compounding in 2026

The tax-advantaged accounts available in 2026 remain highly favorable to compounding.[14] The IRA contribution limit is $7,500, or $8,600 if age 50 or older.[14] The Roth IRA contribution limit is likewise $7,500 under age 50 and $8,600 age 50 or older, subject to income limits.[15]

The 401(k) employee contribution limit is $24,500 in 2026, with an $8,000 catch-up for those age 50 and older.[16] SECURE 2.0 also provides an enhanced catch-up contribution limit of $11,250 for many workers ages 60 through 63, subject to plan and income rules; if your prior-year wages with the plan sponsor exceeded $150,000, all catch-up contributions to your workplace plan must be made on an after-tax Roth basis.[16] Health Savings Account contribution limits in 2026 are $4,400 for self-only coverage and $8,750 for family coverage; account holders aged 55 or older can make an additional $1,000 catch-up contribution.[17] HSAs permit tax-deductible contributions and tax-free withdrawals for qualified medical expenses.[17]

A practical rule of thumb is to capture the employer match in a 401(k) or 403(b) first, then consider an HSA if eligible, then fund a Roth IRA, and finally return to the employer plan up to the applicable maximum. This sequence is guidance rather than a universal rule and depends on each investor’s facts and circumstances.

The Quiet Conclusion

Like Franklin’s trust funds, compounding rarely attracts attention, yet it works steadily for those who begin early and stay patient.[4] Retirement success depends heavily on how much is saved, how early one starts, and whether time is allowed to do its work.[10]

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About the Authors

Ron A. Rhoades, JD, CFP®

Ron Rhoades is an Associate Professor of Finance at the Gordon Ford College of Business, Western Kentucky University. He also serves as a financial advisor at Scholar Financial, a practice within XY Investment Solutions LLC. With a background as both an attorney and a CERTIFIED FINANCIAL PLANNER™ professional, Ron is a nationally recognized authority on the fiduciary duties of financial advisors.

Chris Brown, Ph.D., CFP®

Chris Brown is a faculty member in the Department of Finance at the Gordon Ford College of Business, Western Kentucky University, and a financial advisor at Scholar Financial, a practice within XY Investment Solutions, LLC. He holds the CERTIFIED FINANCIAL PLANNER™ designation and a Ph.D. in Finance. His research and teaching focus is on behavioral finance, retirement planning, and evidence-based investment strategies.

Disclosures

This article is for educational purposes only. Scenarios and references to client experiences are used solely to illustrate financial planning concepts. These examples may not apply to your individual circumstances. It should not be construed as financial, legal, tax, or investment advice, nor as a recommendation to implement any specific strategy, product, or investment. As a fiduciary, we provide advice tailored to each client’s goals and financial situation. Consult with a qualified financial professional before making investment decisions.

Advisory services are offered through XYPN Sapphire and its various IAR brands under which it operates. XYPN Sapphire is an SEC registered investment adviser. For additional disclosure and privacy information, please visit XYPNSapphire.com/disclosures.

Footnotes

  1. Franklin Institute. (2023, January 2). Benjamin Franklin’s donor story. https://fi.edu/en/support/benjamin-franklins-donor-story
  2. Philanthropy Roundtable. (2023, January 11). Benjamin Franklin. https://www.philanthropyroundtable.org/hall-of-fame/benjamin-franklin/
  3. Franklin Institute. (2023, January 2). Benjamin Franklin’s donor story. https://fi.edu/en/support/benjamin-franklins-donor-story
  4. Philanthropy Roundtable. (2023, January 11). Benjamin Franklin. https://www.philanthropyroundtable.org/hall-of-fame/benjamin-franklin/ ; Franklin Institute. (2023, January 2). Benjamin Franklin’s donor story. https://fi.edu/en/support/benjamin-franklins-donor-story
  5. Philanthropy Roundtable. (2023, January 11). Benjamin Franklin. https://www.philanthropyroundtable.org/hall-of-fame/benjamin-franklin/
  6. Schwartz, S. A. (2020, August 19). How a 200-year-old gift from Benjamin Franklin made Boston and Philadelphia. Mental Floss. https://www.mentalfloss.com/article/627475/200-year-old-gift-from-benjamin-franklin-to-boston-and-philadelphia
  7. Schwartz, S. A. (2020, August 19). How a 200-year-old gift from Benjamin Franklin made Boston and Philadelphia. Mental Floss. https://www.mentalfloss.com/article/627475/200-year-old-gift-from-benjamin-franklin-to-boston-and-philadelphia
  8. Franklin Institute. (2023, January 2). Benjamin Franklin’s donor story. https://fi.edu/en/support/benjamin-franklins-donor-story
  9. Philanthropy Roundtable. (2023, January 11). Benjamin Franklin. https://www.philanthropyroundtable.org/hall-of-fame/benjamin-franklin/
  10. gov. (n.d.). Compound interest calculator and information. https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
  11. Compound-interest arithmetic based on the assumptions stated in the article. Numerical outputs derived from the standard compound-growth formula.
  12. gov. (n.d.). Saving and investing. https://www.investor.gov/introduction-investing/general-resources/news-alerts/alerts-bulletins/investor-bulletins-13
  13. (2024, December 19). Why expense ratios matter. https://www.fidelity.com/learning-center/investment-products/etf/expense-ratio-etf
  14. Fidelity Investments. (2026, April 20). IRA contribution limits for 2026. https://www.fidelity.com/learning-center/smart-money/ira-contribution-limits
  15. Fidelity Investments. (2026, April 20). Roth IRA contribution and income limits for 2026. https://www.fidelity.com/learning-center/smart-money/roth-ira-contribution-limits
  16. (2025, December 31). What are 2026 401(k) and individual retirement account max contribution limits? https://www.principal.com/individuals/learn/what-are-2026-401k-and-ira-max-contribution-limits

Fidelity Investments. (2026, May 5). HSA contribution limits 2026 and 2027. https://www.fidelity.com/learning-center/smart-money/hsa-contribution-limits

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