Why Do People Fail Financially? Misunderstanding Compound Interest
For part three of our series on “Why Do People Fail Financially?”, we are going to address the concept of Compound Interest.
Building Wealth through Compound Interest
I often hear things like: “I’m starting from scratch. It’s impossible!” That kind of thinking is a major roadblock to financial success. You need to have some faith. Building wealth is like spiritual development; it’s not a get rich quick scheme. It is a slow continuous process. Just like spiritual growth, you need to grow carefully: Spiritual growth and character growth must proceed slowly and steadily.
Too often, we want to improve ourselves and our relationships so quickly that we make ourselves frustrated and confused. Gifted sports stars, actors, musicians and superstars, those born into wealth by inheritance, those who won the lottery and those who won the big lawsuit, all have one thing in common. They are rare! That’s why they are constantly stalked by the media. And even with all their wealth, if they lack a spiritual foundation, they live very unhappy lives. The reason? They start to worship their money rather than God. People can become so focused on exterior pleasures and material items they lose sight of real happiness that is internal.
So, unless you fit in one of those extraordinary superstar groups, you will be accumulating wealth just like the rest of us mortals— the way you should— by building your wealth slowly and steadily. The good news is that even with a slow and steady approach, understanding compound interest really helps you stay focused. You can easily calculate your future results today and see the bright lights shining at the end of the success tunnel. Why? Because little pieces of money saved over long periods of time can build substantial wealth, very realistically— making it very obtainable.
Want a Great Job for 30 Days?
As an illustration, let me offer you a job. This job will pay you one dollar for the first day, two dollars for the second, four dollars for the third, and so on for thirty days. Would you take that job? Yes! Most people jump up in my class and say “Yes!”. And when I ask them why, they tell me because it’s a lot of money. Then I ask how much money do you think it is at the end of 30 days? They say a million dollars, but they never say over a half a billion dollars!
The amount is a staggering $536,870,912.00!
That’s FIVE HUNDRED AND THIRTY-SIX MILLION EIGHT HUNDRED SEVENTY THOUSAND NINE HUNDRED TWELVE DOLLARS!
Get out your calculator or do the math by hand. It doesn’t matter. One dollar for the first day, two for the second, four for the third, and keep going.
The example is used to illustrate that most people just can not comprehend the value of compounding interest. But with proper planning, combined with the discipline of saving small amounts of money over long periods of time, you can and will build significant wealth.
Make a Plan
You can pre-calculate the amount by using any future value calculator (and there are hundreds of them for free online). If you have no access, ask a family member to help. You calculate the amount you plan on saving each month or week, then plug in the number of weeks, months, or years. You will see the results in advance. I recently did a calculation for a friend who was receiving $2000 a month from Social Security. He did not need the money. At his age (60), if he lived into his 90s (or 30 more years), he would be a billionaire.
The Key is maintaining and monitoring. You Also Need A Positive Cash Flow, Then You Need To Earn A Reasonable Return On What You Saved. If you’re like most people seeing the end result will keep you motivated. Savings and Compound Interest is the opposite of the Dark Side. It’s more like Luke Skywalker. “Use the Force, Luke.” You need it, because everywhere, and every moment, someone from the Dark Side is trying to separate you from your money. You want to get to know the compounding of interest. Slow and steady wins the race; the quick fixes can put you back behind bars!