Are the rules in what we’ve been taught to make a living valid? Is the education system teaching the proper stuff?
For example, do we teach our students or young adults in the family about compounding?
Below is a simple example showing the power of compounding.
Say you have 20-year old twins: Dan and Toby. (Read carefully in this example since this concept of compounding can transform family’s future and generations to come.)
Dan, who understands the power of compounding, invests $4,000/year in a mutual fund or in an investment account earning a return of 10%/year (currently, banks or cash accounts do not offer this high rate but it did in the past during the 1970s).
Dan does not touch the account and continues to invest for the next 20 years. In other words, Dan continues to reinvests the money he puts in. Dan is one smart guy and at 40 years old, he stops investing but he leaves the money alone to grow at 10% year.
Now let’s look at his twin brother, Toby, who starts to invest $4000/year much later at the age of 40 years old. He also invested in an account earning 10% return/year, the same as his brother Dan. Toby continues to invest for the next 25 years.
Now imagine fast forwarding when the twins are at age 65 and see who has the most money between Dan and Toby? Any guess?
Toby started saving at age 40, reinvested his money for the next 25 years. Toby earned less than $400,000 dollars at age 65…not bad.
What about Dan who started saving at age 20 and stopped investing at age 40…wait for it…?Dan would have earned $2.5 million…Wow!
LESSONS LEARNEDThis is important…As young entrepreneurs, you have time on your side…a big advantage when compared to adults.
The big mistake that most people make when it comes to money is the lack of understanding to the power of compounding. The earlier you start and use the power of compounding, the more money you will make.
Will information about compounding will be covered in future posts.
The above example was extracted from an animated video for 4-17 year olds. You can message me if you are interested in seeking the animated video for kids 7-17 years old.
If you want to understand the math behind the example, please send me a message as well.
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