Did You Know That The Margin Between The Rich And The Poor In America Has Been Growing For Decades?
Ever Wondered Why There Is Such A Large Divide Between The Rich And Poor Of America?
Here is the underlying reason most American never become Millionaires: It’s because they aren’t financial literate.
Experts have found that today’s America is now in a downward trend in financial literacy, having fewer people who are financially literate this year when compared to previous years. Whether it’s the education system or the rise in anti-literacy groups or a plot by the rich to stay rich, the drop in financially literate people is a grim reality for our country’s future.
Here are some statistics: A recent survey has found 75% of college students to admit to not being ready to make smart financial decisions. A study testing financial literacy in high school seniors over the country found that less the half the participants correctly answered the questions.
So, Is Being Financially Literate Difficult?
The answer to this is, no it isn’t. While there are those who don’t know the difference between a savings account and a long-term investment, it doesn’t mean you can’t become a self-made millionaire.
Here is the simplest way you can become a millionaire without doing anything major: Compound Interest.
Compound Interest: The Best Friend Of Every Millionaire
The textbook definition of Compound Interest is “Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods of a deposit or loan.”.
Simply put, compound interest can be thought of as interest on interest. Its growth is at a faster rate when compared to simple interest as simple interest is calculated only on the principal amount whereas compound interest is interest calculated on the principal amount as well as the accumulated interest earned previously.
So, that’s what compound interest is. But how does it really work? Let’s find out with a simple case study with Arthur and Ben.
Becoming Rich Or Richer With Arthur And Ben
The scenario for this is a simple one. Arthur and Ben are best friends since being toddlers. As they grow up, they start considering their futures.
So, Ben starts his investment portfolio at 19, by investing $2,000 per year for 8 years. As for his investment, he gets a 12% interest rate with a total principal investment of $16,000 over 8 years when he stops injecting any more money at age 26.
Arthur on the other hand only starts his investment career at age 27. And just like his friend Ben, he puts in $2,000 per year with a 12% interest rate, until retirement at age 65. Arthur’s investment period is 23 years longer than Ben’s with a total investment of $78,000 over 39 years.
So, when both Ben and Arthur compare their investments at 65, they find out the true potential of compound interest.
Arthur And Ben: The Final Results Of Compound Interest
This is a spreadsheet with the calculations of both Arthur’s and Ben’s investment portfolios.
Ben invested a total of $16,000 and Arthur, $78,000. The surprising outcome of this comparison is that Ben ended up with $700,000 more than Arthur.
Arthur’s final portfolio valued at $1,532,166 and Ben’s final portfolio valued at $2,288,996.
How Can You Be Like Ben And End Up Turning $16000 To $2.3 Million?
Simple, with the help of compound interest. The longer compound interest works the better your investments. As Ben started earlier, the interest on his money started sooner.
The point to take away is that the sooner you start, the better of you will be. Only you can make yourself and others aware of how useful and important this is for your futures. While our countries financial literacy system is poor, our communication systems are the best around the world. Use social media to promote this simple yet vital tool so that we can help eradicate the poor-rich divide by having more people like Ben who can enjoy being millionaires with only a few thousand in investments.
Your feedback is appreciated, let us know your thought on the financial literacy in your part of the world and your view on the importance of compound interest, by commenting below or sharing through Facebook and Twitter.