Observations on life

According to a USA TODAY Money story: 

According to research out of George Washington University, only one-third of Americans actually get how compounding works, leaving most of the public in the dark. And you really don’t need a math brain to grasp the concept. You just need to run some numbers to see how compounding can help or destroy your finances.

Let me demonstrate:

Save $100 a month for thirty-years, earn 5% annually  and you will have $ 83,673, but only $36,100 of that amount is the money you saved. The balance is due to the power of compounding interest. Interest on interest added to your savings. 

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2 replies »

  1. I fear that it will only get worst. Most people that I work with in a highly technical field do not even balance their checkbook. You see there is an app for checking how much money is in your bank account. They are just lazy and do not care. As long as their debt card or credit card works, they don’t care.

    On the other hand I am anal about where every penny is or went. I am not cheap and waste my fair share of money. But I found out decades ago you cannot save money until you understand where it is going. I also started my adult life with a 18% car loan and a 10% mortgage a few years later which was a great improvement over the 14% mortgages. 0% car loans have been available sine 9-11. Wait until the day interest rates climb again. These people will not understand what happen to them.

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  2. No surprise -Rates of “innumeracy” exceed rates of “illiteracy” among Americans.

    Read 10+ year old study: http://www.dartmouth.edu/~alusardi/Papers/FinancialLiteracy.pdf

    “… Our analysis shows that financial illiteracy is widespread among older Americans: only half of the age 50+ respondents could correctly answer two simple questions regarding interest compounding and inflation, and only one-third correctly answered these two questions and a question about risk diversification.”

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