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Understanding this simple financial concept is CRUCIAL!

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Our friend Tony did it again. I love articles that are encouraging in that if more people understood compounding interest, they could control a lot more of their circumstances. 

His article is MINDBLOWING! 

https://tonyisola.com/2019/06/compounding-gone-wild/

Excerpt:

A sample of investors was asked, ” How much money would someone have after investing $400 monthly for 40 years while receiving a 10% average annual return?

Their average response was $211,200. The correct answer is $2,594,211.13 or 12x as much!

Not surprisingly, exponential growth bias generates a reverse effect regarding debt. Forcing people to underestimate the devastating effects of high-interest credit cards, encouraging them to only make minimum payments.

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So most people don’t know math. Depressing.

I’m always shocked when I hear a full grown adult claim they never use algebra. How different is their life than mine? I use it to properly space out medications, to water and treat my lawn, to plan my investments, to track and adjust weight loss, to adjust my weight lifting program, to determine if purchases (house, car, AC, etc) are worthwhile, to order the proper amount of mulch, and on and on it goes.

I guess everybody else is just winging it?

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20 hours ago, EdLaFave said:

So most people don’t know math. Depressing.

I’m always shocked when I hear a full grown adult claim they never use algebra. How different is their life than mine? I use it to properly space out medications, to water and treat my lawn, to plan my investments, to track and adjust weight loss, to adjust my weight lifting program, to determine if purchases (house, car, AC, etc) are worthwhile, to order the proper amount of mulch, and on and on it goes.

I guess everybody else is just winging it?

My gift is frugal living. I had to take Algebra twice in college. However, I remember thinking in high school how cool it would be to live off the interest of my money. So I knew and understood compounding interest. I know an acquaintance who teaches economics at Columbia University, graduated at Cal Tech here in California, a very bright man who writes academic studies on economics and he has his money in CDs.  

  1. No Medications: because I also lived a healthy lifestyle (little drinking, no smoking, control weight via gym and running) I take no medications.
  2. The lawn is taken care of by my HOA
  3. Weight control is with eating right and exercising forever. I never was on a diet!
  4. I lift weights, no adjustment needed. At my age or any age, if people just make an effort to strengthen their bodies would go a long way to reducing excessive and use. 
  5. Bought used cars all of my working life. I hated car payments and use the money to invest instead (this simple fact is in MANY financial books and is as old of advice as the Old Testament). Only in retirement did I purchase two new cars with the expectation that I will be saving on no gas or oil, no smog device inspections, no transmissions, engine cooling systems, brakes are still good after 66000 miles because of the brake regeneration on electric cars. 
  6. I just throw my kitchen refuge in the garden. I grew some great tomatoes this year! 

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There are so many easy concepts folks need to grasp in order to understand investing. Compounding is key but Rule of 72, pay yourself first, and others are important too. I still think dollar cost averaging is one of them.

 

Ed,I might be using Alegbra had it been taught to me in an applied manner instead of in the abstract. I never got to learn its usefulness.... but then again math was never easy for me. If algebra could be used in finance just imagine if teachers would have connected those two concepts together and taught it that way. We would be more literate in both areas.

Steve, I am surprised how much this sounds like me on every count except I do my own yard work. In fact, I live on an acre lot and if I plant another tree or bush my wife says she's leaving me. I also have a garden. I started lifting weights/excercising a few years ago upon retirement  seriously and lost 16 pounds I didn't thinkI needed to lose. My two autos are not new and are payed for. And you know  how I invest.  From the pictures I've seen of you , you  look strong. I appreciate people who take care of themselves because so many don't .

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I suspect we all sound alike, after all, we are resourceful. Call it frugal or efficient, it all means the same thing. I learned it from my grandmother - learn to manage the resources you come across. I was proud when she used to call me "resourceful". I thought, well, yeah, what else is there?

Managing your food, your diet, your yard, garden, cars, time, money, work, etc has a name - resource management and was the foundation of Home Ecology as taught and documented by Ellen Swallow Richards in the late 1800's. She was the first woman allowed into MIT (though they would not allow her to pay tuition so as not to set a precedent of admitting women). They caved, though. She felt all women should be educated on the sciences of running a house, including the chemicals used in cleaning, agriculture, nutrition and food, water and air quality and identified their vital role in the economy. 

Quite an interesting woman and she is credited with the academics of Home Economics used in education.

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