Thursday inspiration
"The easiest way for your children to learn about money is for you not to have any."
-Katharine Whitehorn
That isn't the most profound or funniest thing ever written by that delightfully humorous British columnist and author, but it fits a topic I wanted to briefly discuss. I try to keep tabs on war, economic, and scientific news as well as vary my sources to reduce the effect of reporting bias (I avoid mainstream American reporting as much as possible). Very prominent in the news lately has been the declining economy of many nations, particularly the United States and the United Kingdom (because my news sources tend to be in English).
What I see a lot of in both cases is a complaint that the rich are getting richer and the poor are getting poorer. This is generally attached to an argument that money should be taken from those who have more of it and given to those who have less of it.
I first want to state that I did not grow up poor, but neither did my family have an excess of money. Both of my parents attended college, and both earned Bachelor's and Master's degrees. They both had to take student loans, and both had to work while in college and afterwards. I grew up while they were still deep in debt and only making entry-level salaries. I grew up eating a lot of ramen and macaroni and powdered cheese. I learned early the power of money and saving because very few things were bought for me. I did chores in exchange for a weekly stipend, and if I wanted more money I had to request more work and it had to be available (like staining a wood floor or washing the sides of the small house). Not that the terms are by any means definitive, but I would consider us as having been "lower middle-class" until I was in high school, at which point my parents had both climbed the corporate ladders and we would have been "lower upper-class".
I wanted to state the above paragraph because I think it is important to note that my grandparents, my parents, and I did not grow up with any formal education or inside knowledge of investment or finance. When my parents finally made it as big money earners, they didn't know how to handle it. When they didn't have excess money they didn't pay down their debts, and that same mindset of paying minimum amounts carried over to when they finally did have money. Instead of paying down debts and putting some away, they went on expensive vacations and traveled to Europe. I'm not going to criticize their spending because it is their money and they have a right to do with it as they please, but I think the same type of "spend it as you get it" mindset is what is separating the rich from the poor, more so than the dollar values of their bank accounts.
The little I know about finance has come from my search for the knowledge, and with the ease of data access through the internet, I find there are very few excuses for people not to know at least as much as I do.
"Compounding" is how wealth grows quickly. If you save $1000 and get 5% interest a year, after the first year you have $1050. After the second year you have $1102.5, which is $2.5 more profit than the first year, and comes from having that extra $50 earning interest. It is a simple concept, and I still cannot fathom how most people seem to overlook it so easily. That same $1000 at 5% after 15 years will have doubled without having had to do anything but keep it in the same account earning the same interest. Add extra money to the account and it will grow faster, add that money early and it will grow faster still.
More money invested means larger returns, and that principal holds true regardless of your income. If you earn $35,000 and save $15,000 of it, your investment will grow faster than the investment of someone who earns $100,000 but only sets aside $10,000. After ten years, $35k income + $198k investments > $100k income + $132k investments, and the larger $198k investment is still growing faster because of its size advantage.
The same principal can be used to reduce your debt if you consider that your lender is using compounding against you. Pay as much back as quickly as possible to reduce the amount of money your lender is earning interest on.
There are practical limits to every economic theory, and a person who earns $15,000 annually is much more likely to face difficulty saving $100 a year than the person who earns $100,000. Regardless, I stand by the notion that "rich getting richer and poor getting poorer" is more the result of lack of willpower and creativity than the flaws in the social, legal, or economic systems. I have large debts from my own student loans, but I have the self-motivation to work out from under the burden.
I wasn't born wealthy, but I'm working hard to make it there before I die.
-LNC
-Katharine Whitehorn
That isn't the most profound or funniest thing ever written by that delightfully humorous British columnist and author, but it fits a topic I wanted to briefly discuss. I try to keep tabs on war, economic, and scientific news as well as vary my sources to reduce the effect of reporting bias (I avoid mainstream American reporting as much as possible). Very prominent in the news lately has been the declining economy of many nations, particularly the United States and the United Kingdom (because my news sources tend to be in English).
What I see a lot of in both cases is a complaint that the rich are getting richer and the poor are getting poorer. This is generally attached to an argument that money should be taken from those who have more of it and given to those who have less of it.
I first want to state that I did not grow up poor, but neither did my family have an excess of money. Both of my parents attended college, and both earned Bachelor's and Master's degrees. They both had to take student loans, and both had to work while in college and afterwards. I grew up while they were still deep in debt and only making entry-level salaries. I grew up eating a lot of ramen and macaroni and powdered cheese. I learned early the power of money and saving because very few things were bought for me. I did chores in exchange for a weekly stipend, and if I wanted more money I had to request more work and it had to be available (like staining a wood floor or washing the sides of the small house). Not that the terms are by any means definitive, but I would consider us as having been "lower middle-class" until I was in high school, at which point my parents had both climbed the corporate ladders and we would have been "lower upper-class".
I wanted to state the above paragraph because I think it is important to note that my grandparents, my parents, and I did not grow up with any formal education or inside knowledge of investment or finance. When my parents finally made it as big money earners, they didn't know how to handle it. When they didn't have excess money they didn't pay down their debts, and that same mindset of paying minimum amounts carried over to when they finally did have money. Instead of paying down debts and putting some away, they went on expensive vacations and traveled to Europe. I'm not going to criticize their spending because it is their money and they have a right to do with it as they please, but I think the same type of "spend it as you get it" mindset is what is separating the rich from the poor, more so than the dollar values of their bank accounts.
The little I know about finance has come from my search for the knowledge, and with the ease of data access through the internet, I find there are very few excuses for people not to know at least as much as I do.
"Compounding" is how wealth grows quickly. If you save $1000 and get 5% interest a year, after the first year you have $1050. After the second year you have $1102.5, which is $2.5 more profit than the first year, and comes from having that extra $50 earning interest. It is a simple concept, and I still cannot fathom how most people seem to overlook it so easily. That same $1000 at 5% after 15 years will have doubled without having had to do anything but keep it in the same account earning the same interest. Add extra money to the account and it will grow faster, add that money early and it will grow faster still.
More money invested means larger returns, and that principal holds true regardless of your income. If you earn $35,000 and save $15,000 of it, your investment will grow faster than the investment of someone who earns $100,000 but only sets aside $10,000. After ten years, $35k income + $198k investments > $100k income + $132k investments, and the larger $198k investment is still growing faster because of its size advantage.
The same principal can be used to reduce your debt if you consider that your lender is using compounding against you. Pay as much back as quickly as possible to reduce the amount of money your lender is earning interest on.
There are practical limits to every economic theory, and a person who earns $15,000 annually is much more likely to face difficulty saving $100 a year than the person who earns $100,000. Regardless, I stand by the notion that "rich getting richer and poor getting poorer" is more the result of lack of willpower and creativity than the flaws in the social, legal, or economic systems. I have large debts from my own student loans, but I have the self-motivation to work out from under the burden.
I wasn't born wealthy, but I'm working hard to make it there before I die.
-LNC