What If Scenarios
What if you placed a cent into a bank account @ 1.29% interest for 1,000 years? After 4.5 years you would have 2 cents! Not bad right? OK, bear with us. About 2.5 years later you would get another cent! Not much, we understand. What we want to point out is that the first cent took you almost 5 years to make, but the second one only took 2.5 years.
What do you think that penny would be after the full 1,000 years? If you guessed $3,975.48 then you are absolutely correct. At first, your money grows very slowly, because you are working off of the principal, but eventually your interest will outpace your principal which is exactly why 1 penny can turn into almost $4,000.00!
Please note, this article will ignore inflation because we’re trying to teach a basic concept.
1,000 years, I’ll be lucky to reach 100!
We know that you probably won’t live to see 1,000, but we had to use an obscene timeline to explain exponential math. Exponential doesn’t happen over night, but it can happen! What you need to ask yourself is: Is Your Money Exponential?
I Like To Buy Things
Think of this, for every cent you spend, you have just lost about $4,000 dollars over the course of a 1,000 year time line. How much do you need that TV now? What we are explaining right here is your money has earning potential! If you spend your money, Bam! That is it! No more earnings, period. Your money never even had a chance to grow.
You officially killed your money, in some senses. If you put the money in the bank, then you will have earnings that you can use! Or, if you can resist, you can leave it in there longer. The longer your money remains in the account, the closer it gets to going exponential. If you spend the money before it can progress, then you’ll never grow your money. Look at the image below to illustrate this:
But people don’t understand this. People don’t understand that purchasing the $5,000 TV steals thousands upon thousands more from themselves in the future. Do you want a $5,000 TV now, or $270,000 50 years from now? Because, had you put that $5,000 into a mutual fund paying 8% (which is easy!) you could have nearly $270,000 in 50 years!
Indulgence Is Your Enemy
We’re not saying that you should stop living, but if you stop living so large, you’ll benefit from exponential money. You’ll toss the $5,000.00 TV into the garbage in 8 years anyways, so why not put an extra $265,000 into your pocket? Let’s say we’re wrong and the mutual fund tanks for a while, you’ll still end up better off with maybe $100,000, you poor thing. We’d rather have an extra $100,000 in our pocket, than a $5,000 dollar TV in the garbage (which is a 100% loss if you have your calculator out).
You’re Being Robbed!
People tend to freak out when someone approaches them saying “Give me all of your money!” But they never seem to freak out when they toss potential millions out the window on useless items. This is because the majority of people do not understand the mathematics behind money. If you don’t learn the mathematics behind money, then you’ll be a walking target with a sign on your back that reads “Hold Me Up, I Don’t Know Math.”
