61% of those surveyed did not understand how compound interest works.
61%!
Compound interest is, as Albert Einstein once said, “the eighth wonder of the world”. Sophisticated investors understand it, and use it to create wealth.
Ok, so
let’s try a little test here.
Are you ready?
Would you rather have $1,000,000 today, or a penny today that is doubled every day for 31 days?
Well obviously, you want the $1,000,000 right? If you take a penny and double it, you get:
- 2 cents on day 2
- 4 cents on day 3
- 8 cents on day 4
- 16 cents on day 5
- 32 cents on day 6
- 64 cents on day 7 ..
.. so after a week, you’ve only got 64 cents.
“Hmm. Thanks, but I’ll take the $1,000,000.”
That’s what most investors would do – in fact, 61% chose the $1,000,000 today.
But if you understand the power of compound interest, you would quickly have taken the penny being doubled.
Why?
Because a penny doubled every day for 31 days actually gives you .. $10,737,418.24.
Yes, that is over
TEN MILLION DOLLARS.
So you’re up about $9 Million dollars by going for the penny. Doesn’t make sense, does it? If you don’t believe me,
here’s the math proving it.
Anyway, the survey went on to show several other shocking and scary statistics, including:
- 61% don’t know what portfolio diversification means
- almost 40% believe that Social Security is a good safety net for retirement
- 42% believe that a sudden windfall like winning the lottery or an inheritance is the most likely way for a 25 year old to build a large nest egg.
HUH?
This kind of information scares me, and upsets me. It’s no wonder that, in a world where there’s more information and knowledge available than at any previous time, more people are in debt and doing worse than the world has ever seen.
Here’s the problem —
the system just isn’t set up to provide the education. Want to change the financial outlook for a generation? Add financial literacy as required content in the school system.
That’s all it would take! But of course, most of the people running the school systems are completely financially illiterate themselves, so that’s not likely to happen.
Don’t get me wrong — I’m not criticizing the people that run the system, only the system itself. The financial industry has done a great job building generations of fools when it comes to money and investing.
So, do I think that most investors are idiots? Of course not! The reality is, it’s not their fault. They’re simply not given a chance because they’re not provided the education and information they desperately need.
That’s why I love what I do — helping turn on the light for people, and helping them get control of their money, and their future.
Of course, if you are someone who gains the knowledge and insight, creating massive wealth in this day and age is actually very simple, because there really aren’t a lot of people competing with you that know what they’re doing!
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