Thursday, April 23, 2009

Minimum Wage Millionaire

A handful of loose change fell on the floor, in the process, the teenager took the movie ticket and left. Confused, I stooped embarrassedly, before purchasing my ticket, retrieving the change. He was gone. I dropped the money, mostly pennies into my purse.

Small sums of money can't change the course of a person's life. Or can they?
Money has magical powers that people have forgotten or were never taught. Money's magic does not discriminate. Money's magic works for everyone; red, yellow, black or white, blue collar or debutante, the ethical and the untrustworthy. The best part of money's magic is that it is possible to be debt free, financially independent or a millionaire, all on minimum wage using money's magic. If you don't believe me, do the math!

Money's magic starts whenever you have money + interest + time. Money's magic is called Compound Interest. Albert Einstein, the inventor of the atomic bomb, was fascinated by the power of compound interest. In fact, he considered compound interest to be the 8th wonder of the world. Take one penny, just one and tomorrow add another penny to the first penny. The third day double it again and add two more, the third day four cents, the fifth day, eight cents, doubling it each day for a month, 30 days. Would you rather have that one penny compounded for 30 days or $10,000 today? Would Albert Einstein have picked the penny scenario or the $10,000? "Compound" the penny out for 30 days, and it grows to approximately $5,368,702. If you use a 31 day month, it is over $10,000,000!

The importance "time" plays can not be underestimated in understanding, compound interest. In the next example, Mr. Early Bird saves $1,000 a year beginning at age 21. Mr. Early Bird stops completely after 8 years? Mr. Early Bird never again adds to his savings. Miss Late Start saves $1,000 a year for 37 years but she doesn't start until age 29? Both Mr. Early Bird and Miss Late Start earn 10% on their savings. Who is ahead at retirement? Is it Mr. Early Bird, who managed to save only $8,000, or Miss Late Start, who saved consistently and accumulated $37,000? Guess again. Mr. Early Bird has accumulated $427,736 but Miss Late Start has only $363,043. Mr. Early Bird's $8,000 gave him $64,693 more than Miss Late Start's $37,000. This example motivates me to reconsider that $3.00 caramel macchiato, that bestseller in hardback at Costco or the convenience of prepared take-out or call ahead seating. Quit kidding yourself, numbers don't lie--start saving, start saving a "never to spend" savings account today. The sooner the better, remember time is powerful. And we are worth it--to think about life in the long run.

Interest plays it's part, too. Time and Interest work together in compound interest. Time is the tortoise and interest, the hare but in this story they run a three-legged race. How long does it take to double your money? Divide seventy-two by the interest rate and you have the answer. This simple, mathematical formula is called "The Rule of 72." If you are paying 21% interest on a credit card it will take 3.5 years for the credit card company to double your money--in their pocket. That's the problem with compound interest. It works equally as hard against you as it does for you. Compound interest is a double-edged sword. in the beginning of this article, I said money's magic works whenever money, time and interest are present. Make sure that your money is not working against you.

In life, it is to up to the consumer to be able to recognize money's magic, compound interest and capture only advantages from this powerful force.

From Muhammad Yunus

"The power of the daily taka reminds me of the clever prisoner who was condemned to death. Brought before the king on his execution day, the prisoner was granted one last wish. He pointed to the chessboard at the right of the king's throne and said, "I wish onlly for a single grain of rice on one square of the chessboard and that that grain be doubled for each succeeding square."
"Granted," said the king, who could not fathom the power of geometrical progression. Soon the prisoner regned over the entire kingdom."

1 comment:

  1. So true. I learned the magic of compound interest when I was 29, but I still wish I learned it sooner.