RPF0156-Compound_Interest
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00:00:31.960 | Today on the show we dig into compound interest and
00:00:37.320 | We go through the lessons that we can learn from the magic penny
00:00:45.980 | You've heard the example right the magic penny that doubles in value
00:00:49.760 | What are the actual lessons of that?
00:00:52.460 | Welcome to the radical personal finance podcast. My name is Joshua sheets, and I'm your host and today is Monday, February 23
00:00:59.920 | 2015
00:01:03.740 | If I offer you two choices one is a million dollars cash today or is it a million dollars cash tomorrow?
00:01:10.420 | You're gonna have to answer that question. It's a personal choice, but it's a personal choice for you
00:01:15.300 | So you're gonna have to answer it for the rest of your life, but if you're thinking about it for the rest of your life?
00:01:19.300 | You're gonna have to answer it for the rest of your life. So if I offer you two choices one is a million dollars cash today
00:01:24.300 | Or the other is a magic penny that doubles in value every day for a month
00:01:28.620 | Which of those would you choose and why?
00:01:30.620 | Now I would guess that for most of you that's not the first time you've ever been asked that question
00:01:45.240 | People listen to this show generally are not new on they didn't just fall off the cabbage truck or the turnip truck or this isn't
00:01:51.000 | Your first rodeo or whatever. I don't know what you call that in language, whatever saying you want to apply from the South
00:01:57.300 | So we talked about turnip trucks and cabbage trucks and rodeos. I don't know what you New Yorkers talk about
00:02:02.280 | But people listen to the show. They're not new to these concepts. And so I'm certain that you've seen this illustration
00:02:07.920 | But my next question is what are the lessons that you've taken from this illustration?
00:02:13.960 | What are the lessons that you've learned I
00:02:15.960 | Want to walk you through five specific lessons in today's show that I think that you can learn from this illustration
00:02:23.800 | Now before I get into the specific lessons
00:02:26.600 | I do want to mention to you the numbers involved because it may have been a while since you've actually looked at the numbers involved
00:02:33.960 | I'm gonna run through this quickly on the on in audio format
00:02:38.920 | Any I'm doing I'm taking the risk anytime I go through numbers. I take the risk of being boring in an audio format
00:02:44.920 | But I think it's important and I think I can do it quickly enough that it's not boring
00:02:47.840 | but how much money is your magic penny worth at the end of a month a
00:02:53.040 | 31 day month any idea
00:02:57.640 | Well, let's do the math
00:02:59.440 | If you start with one cent on day one and double it each day on day two
00:03:03.600 | You have two cents day three four cents day for eight cents day 5 16 cents day 6 32 cents day
00:03:10.840 | 764 cents
00:03:13.720 | Day eight dollar twenty-eight next 256 five dollars twelve ten dollars twenty four
00:03:19.960 | $20 48 forty dollars ninety six and day fourteen. You're up to eighty one dollars and ninety two cents
00:03:25.880 | 163 84 3 27 68
00:03:31.640 | 655 36
00:03:33.640 | 1310 dollars and 72 cents on day 18
00:03:37.240 | 19 is 2006 21
00:03:40.360 | 5242
00:03:43.200 | 10485 on day 21
00:03:45.840 | 20,971 on 22
00:03:49.520 | 41943 on 23
00:03:52.640 | $83,886 on day 24 day 25
00:04:00.120 | $1,772 this is the time in the illustration at which if your friend took the million dollars
00:04:05.400 | You're still looking pretty jealously at your friend with a million bucks and you're almost out of month and you've only got a hundred and sixty
00:04:11.480 | Seven thousand seven hundred seventy two dollars in your account
00:04:14.280 | But day 26 you have three thirty five
00:04:17.240 | Five forty four three hundred thirty five thousand five hundred forty four dollars day 27
00:04:23.160 | $671,000 and finally on day 28 you cross the million dollar mark
00:04:28.480 | You're at 1 million three hundred forty two thousand dollars and now it gets good day 29 2 million six hundred eighty four thousand
00:04:36.360 | day 30 five million three hundred sixty eight thousand and
00:04:41.320 | On day 31 your magic penny is now worth ten million
00:04:47.440 | seven hundred thirty seven thousand four hundred and eighteen dollars and twenty four cents
00:04:53.080 | Ten million seven hundred thirty seven thousand four hundred eighteen
00:04:58.360 | dollars and twenty four cents
00:05:00.360 | Amazing, huh? Isn't that incredible?
00:05:03.160 | Isn't that absolutely incredible
00:05:06.760 | now I
00:05:08.760 | Don't want to just spend time thinking about how incredible it is
00:05:11.680 | But truly is I want to talk today about what are the lessons that we can learn from this illustration because sadly it's only an
00:05:17.840 | illustration
00:05:19.120 | I'm not aware of any investment in the world that I can find to participate in that will double my money
00:05:24.000 | Every day for a month. So this is primarily a thought experiment
00:05:28.360 | But certainly there are lessons from this that we can learn and that's what I want to share with you. Lesson number one is
00:05:34.720 | rate of return matters
00:05:37.680 | Rate of return matters big-time
00:05:41.880 | To go from one cent to ten point seven million dollars in 31 days is only
00:05:49.640 | Possible in a world where your money doubles every year
00:05:54.480 | Now can I tell you that
00:05:56.480 | There's an investment that you can buy a mutual fund a stock in which your money will double every year
00:06:02.560 | certainly not
00:06:05.280 | At least not for 31 consecutive periods. But are there things that you can do financially that will double your money? I
00:06:12.840 | Believe there are and you want to make sure that you're taking advantage of those things
00:06:18.320 | one of the
00:06:20.920 | trends in our society that I see that really concerns me is
00:06:24.200 | people have
00:06:26.040 | simply assumed that you cannot beat the market and
00:06:29.440 | They've assumed this with good reason by the way much of the academic research illustrates that almost nobody can beat the market
00:06:37.080 | the problem with that scenario, however, is that that's primarily limited to stock market returns and
00:06:44.880 | That is the data is all based upon mutual fund stock market returns because that's where the most reliable data is
00:06:51.000 | but there are problems with that data and
00:06:53.000 | Also, the other problem is not that nobody can beat the market because that's not what the data says
00:06:58.080 | the data says that you can't reliably predict in advance who is going to beat the market and
00:07:02.760 | You can't be confident that their market beating performance is going to persist over a long period of time. That's what the data says
00:07:12.560 | What's interesting is however, there are a bunch of flaws in it and I'm not gonna go into that today
00:07:17.520 | But what's happened what I've seen happen in our society as many times people have just simply said well
00:07:21.600 | I'm not gonna bother to try then I'm not gonna bother to try to find good investments and
00:07:24.520 | This is death to your wealth building. Let me give a couple examples
00:07:28.960 | Instead of focusing on the magic penny. Let's do a little math here and let's focus on a let's put in a 40 year
00:07:34.840 | Investment time horizon. So 40 years and let's run some different interest rates. Let's say we invest
00:07:42.000 | Let's do a Roth IRA contributions. Let's just do let's do $5,000 a year just under the Roth IRA contributions
00:07:48.680 | So we're gonna put in $5,000 annually into an investment portfolio over 40 years
00:07:52.960 | Starting with nothing and we're gonna calculate what a different rates of return our money is worth at the end of 40 years
00:07:59.840 | So let's start with a 4% rate of return 4% rate of return $5,000 invested annually at the end of 40 years as
00:08:06.120 | $475,000
00:08:10.120 | That's big money, isn't it? I don't know. I mean that's big money
00:08:14.320 | Which should give you hope that even if you invest at a relatively low rate of return
00:08:19.840 | You're still can wind up wealthy if you have enough time, but that's lesson number two, so we'll come back to that in a moment
00:08:26.160 | What if we raise this from 4% to 6% now at the end of 40 years instead of 475 we have
00:08:31.460 | $773,000
00:08:34.520 | What if we go from 6% to 8% at the end of 40 years now we have 1 million
00:08:39.560 | $212,000
00:08:40.960 | Let's pop this up to 10% and see what we have
00:08:43.880 | Well now we have 2 million two hundred and twelve thousand dollars big difference
00:08:49.320 | between
00:08:51.480 | $475,000 at 4% and 2.2 million dollars at 10%
00:08:56.240 | Now question what about 15%
00:09:00.440 | 8.8. It's gonna 8.9 million dollars. It's 8 million eight hundred ninety five thousand dollars
00:09:09.440 | What about 20%
00:09:11.440 | 20% it's 36 million dollars
00:09:15.120 | Rate of return matters
00:09:19.240 | Now can I tell you how to get a 20% annualized rate of return in the stock market?
00:09:24.920 | I don't have a clue how to do that
00:09:26.920 | But I guarantee you there's something in your life where you can get a 20% rate of return
00:09:34.440 | It'll be different for everybody but there's something somewhere someplace that you can get a massive rate of return
00:09:41.800 | It may simply be a 20% discount on some of the services and expenses that you are already incurring
00:09:48.200 | It may be avoiding 20%
00:09:51.720 | interest rate credit card debt
00:09:54.440 | If there's something in your life where you can get a 20% rate of return
00:09:58.840 | Can you do that every year for 30, you know for 40 years?
00:10:02.360 | I don't know probably not but there's some people who have
00:10:05.000 | And that's the key some people have usually this is in private enterprise and the growth of business
00:10:13.800 | But leave that for another day rate of return matters
00:10:16.960 | Don't ever forget that and don't ever stop looking and saying where is the most efficient place that I can allocate my capital
00:10:26.760 | Right now, where can I put my money to work for me right now in the best most efficient arrangement possible?
00:10:33.880 | That's the first lesson from the magic penny. Those numbers are so incredible because of the rate of return in a world of 100%
00:10:41.920 | Annual increases it's hard not to get wealthy
00:10:46.760 | Look for those places in your life and take advantage of them
00:10:52.960 | Don't ever walk past the 50% off sale and you know be thinking to yourself. Well, that doesn't matter
00:10:59.080 | No, look at it and say that's 50% off. That's the magic penny
00:11:02.720 | Don't ever walk past the ways that you can increase money substantially and say it's no big deal
00:11:09.960 | That's the magic penny put that to put that habit to use in your life in every area and it will serve you well
00:11:17.720 | next lesson is
00:11:21.320 | The amount of time you invest matters
00:11:23.360 | You can't escape the influence of time
00:11:28.400 | the power of compound interest is driven by
00:11:32.080 | What is the rate of return and how long can we get those returns and how much do we start with?
00:11:40.200 | Now what's fun about the magic penny scenario is it pulls out that third variable how much we start with and it focuses on the rate
00:11:47.200 | Of return and how long we get those returns, but let's go back to
00:11:50.760 | the
00:11:52.760 | Days, let's go back to 21 days. We're three weeks into this month 21 days and we're up to ten thousand four hundred eighty five dollars
00:12:00.280 | We're falling behind here aren't we that's not much money comparatively speaking
00:12:06.400 | Compare ten thousand to a million. There's a big difference there
00:12:09.960 | Day 25 were up to a hundred and sixty seven thousand, but it's only in those last four days where we break a million and
00:12:19.040 | Then the magic happens
00:12:21.040 | Day 27 is six hundred seventy one thousand then on day 28. It's 1 million three hundred forty two thousand day
00:12:29.120 | Twenty nine two million six hundred eighty four thousand day thirty five million three hundred and sixty eight thousand and day thirty one
00:12:36.960 | ten million seven hundred thirty seven thousand dollars
00:12:40.600 | What would have happened if this had been the month of February instead of the month of December in our example?
00:12:46.800 | Well, you'd have 1.3 million dollars and is that
00:12:49.280 | Measurably better than a million dollars. Yes
00:12:52.280 | $300,000 for 28 days of sitting around I'll take it
00:12:56.360 | but it's nowhere near as dramatic as ten million seven hundred thirty seven thousand dollars and
00:13:02.280 | That's a key lesson
00:13:05.720 | Now there's another example that's often used when teaching people about compound interest that I both like and dislike
00:13:11.840 | And that's the example of two different individuals who start investing at different ages
00:13:16.560 | And what how this example is usually presented is as an example of two investors side by side and one investor
00:13:24.160 | begins investing let's say
00:13:26.280 | $2,000 per year at the you know at the age of 18 is often what it is and the other investor waits until the age of
00:13:32.120 | 30 and then starts investing
00:13:33.800 | $2,000 per year what you find is that the person who's waits till a later age winds up with
00:13:40.000 | investing more money and
00:13:42.120 | With less dollars, excuse me, usually the in the person who starts at 18, they usually start investing and then stop
00:13:48.600 | So let's let's run a little math here as an example
00:13:52.040 | Let's say that you have an 18 year old investor and for this example
00:13:55.120 | I'm going to use a 10% interest rate and this person starts
00:13:58.200 | $2,000 per year if you started at $2,000 every year from 18 to 65 at a 10% interest rate
00:14:03.800 | You would have 1.9 million dollars
00:14:08.000 | But now if you compare these two things in this way look at the difference of numbers
00:14:13.840 | If our initial investor begins at 18 with $2,000 and contributes for 10 years from 18 through the 23 year 27
00:14:21.900 | He or she invests a total of $20,000 then the money continues to grow and at 65 this person has 1 million
00:14:29.440 | $260,000 in
00:14:32.920 | Scenario B. This investor starts investing at 28 invest $2,000 per year every year from 28 to 65
00:14:39.120 | they invest a total of
00:14:41.760 | $76,000 and
00:14:43.600 | They have in their portfolio only six hundred and sixty thousand dollars
00:14:46.800 | Time matters
00:14:50.560 | That extra ten years of compounding is huge now compare that to the magic penny
00:14:55.560 | That extra four days of compounding is huge
00:14:59.320 | Time matters
00:15:02.920 | Now what was always frustrating to me about this example
00:15:05.400 | And I was inspired by this example when I was young and I started investing when I was 18 years old and said hey
00:15:09.920 | I got to put my money aside got to put my money aside got to put my money aside
00:15:12.280 | But what's frustrating to me about this chart is no one gives the other side
00:15:15.640 | And so I'm gonna do that for you now. Let's say that you're 28
00:15:18.840 | What do you need to do to catch up?
00:15:22.320 | Well at age 28 investor a the one who started at 18 now has
00:15:25.880 | $37,000 in their account and then they stop contributing all you need to do if you're 28 to catch up
00:15:32.760 | Save $37,000
00:15:34.760 | So if you're 28 years old and you're listening to this
00:15:38.200 | Episode and you're about to go out and buy a
00:15:42.520 | $37,000 card don't
00:15:45.640 | Invest the $37,000
00:15:48.080 | Or if you're age 38, where is investor a at age 38? Well investor a at age 38 has
00:15:53.800 | $96,130 in their portfolio
00:15:58.080 | If you're 38 years old and you're feeling behind all you got to do is catch up is invest
00:16:02.320 | $96,000 now, is that a lot of money? Sure. Can you find it? Yes
00:16:06.320 | If you haven't saved it get started
00:16:09.080 | That's the point because from age 38 to age 40
00:16:12.860 | Investor a who started with $2,000 for 10 years the growth in their portfolio goes from
00:16:18.720 | $96,000 to
00:16:21.240 | $116,000 let's say that you at age 38 want to wake up and say I got to save some money and you want to you know
00:16:26.760 | Get this thing going for you. Well
00:16:28.760 | 116,000 divided by 3 is
00:16:31.120 | $40,000
00:16:32.920 | Can you find a way to save $40,000?
00:16:35.160 | Maybe not
00:16:37.800 | But let's say between 44, you know, and I mean you can run the math, you know forever if you've got eight years
00:16:44.240 | Can you save 20,000 a year? The point is get started and if you want to catch up
00:16:50.280 | It's relatively easy to catch up on this interest chart
00:16:54.240 | If you just simply identify where you are and where you want to go and put more money after it
00:16:59.160 | Time matters so run these examples of the two individuals the one who has the longer time period and
00:17:07.040 | Try to get that time period working on your side
00:17:11.680 | And if you're behind don't worry about it just catch up
00:17:16.200 | Easy for me to say right lesson number three in the beginning
00:17:20.820 | It's easy to spend and that's what most people do. So let's go back to this magic penny
00:17:24.840 | after 10 days of investing
00:17:27.480 | One penny doubling each day one cent two cent four cents eight cents sixteen thirty two cents sixty four cents a dollar twenty eight
00:17:34.520 | Two dollars fifty six five dollars twelve on day ten. You have five dollars and twelve cents
00:17:39.980 | What amiss most people do when they accumulate five dollars and twelve cents?
00:17:43.900 | They spend it
00:17:46.840 | To go to their local fast-food store and they buy a value meal
00:17:51.020 | It's easy to spend isn't it?
00:17:53.900 | What if we go another ten days?
00:17:56.640 | So five dollars goes to ten dollars twenty four twenty forty eight forty ninety six eighty one ninety two one sixty three eighty four three
00:18:03.760 | twenty seven sixty eight six fifty five thirty six one thousand three ten seventy two
00:18:08.740 | Two thousand six twenty one and on day twenty now we have five thousand two hundred and forty two dollars
00:18:15.020 | What do most people do when they have five thousand two hundred forty two dollars and eighty eight cents piled up?
00:18:19.500 | Spend it and they drop back 20 days in their interest chart
00:18:25.280 | Now, I don't know necessarily what they spend it on five thousand bucks to me sounds like a round-the-world trip ticket
00:18:31.840 | That's what I would spend it on some people. It's a down payment on a fancy card some people
00:18:36.420 | It's I don't know half of a down payment on a house
00:18:38.420 | But they spend it you're a day 20 and you have five thousand two hundred forty two dollars
00:18:44.600 | And you spend it not recognizing that in 11 days
00:18:48.580 | Five thousand two hundred forty two dollars will grow to be ten million seven hundred thirty seven thousand four hundred eighteen dollars and twenty four cents
00:18:56.200 | Every dollar matters in the beginning every single dollar matters in the beginning
00:19:05.640 | And the Bible in the book of Zachariah says do not despise the day of small beginnings now
00:19:10.540 | that's completely taken out of context, but it's become a
00:19:13.760 | Common phrase because it's so useful do not despise the day of small beginnings
00:19:18.580 | Don't despise five thousand dollars of capital don't despise five dollars of capital
00:19:24.680 | That is your seed capital for your fortune. That's the seed capital for your empire. Don't despise that and squander it
00:19:32.280 | Don't despise the day of small beginnings
00:19:37.320 | Many people do that and especially if you're interested in building wealth
00:19:42.800 | Remember if all your friends took the million bucks and are spending it you're sitting over here with your five thousand dollars
00:19:49.420 | You look a little foolish, don't you?
00:19:52.680 | You look a little foolish
00:19:55.560 | You look a little foolish when you're driving your you know, your cheap car
00:19:59.600 | You're you're I don't know what you're living in your small apartment or you're building your business. You look a little foolish
00:20:08.120 | But don't worry about it stay focused because in the beginning every dollar is important
00:20:13.640 | So easy to spend in the beginning and that's what most people do but that's not you you're not most people
00:20:19.880 | Now in the later years you can really siphon off some money without too much damage to your portfolio
00:20:26.320 | And this is the corollary
00:20:29.200 | Both of these things are exciting and the fullness of time assuming you're around to enjoy the growth of your investments
00:20:35.100 | You can siphon off some money. Let's say that on day 27 now, you're up to six hundred seventy one thousand eighty eight dollars
00:20:41.060 | You're well on your way to being a millionaire, you know the next day if you don't take any money off
00:20:45.380 | It's gonna be 1 million three hundred and forty two thousand dollars. You're well on your way
00:20:49.160 | Now you want to buy a new car and you want to pull off thirty thousand dollars. Does that measurably impact?
00:20:54.880 | Your financial plan not really not comparatively speaking
00:21:01.000 | So if you're older and you've got this compound interest working on your side
00:21:05.040 | Spend some money. It doesn't you can spend some money and increase your lifestyle without it measurably impacting your investment results
00:21:12.720 | It's a big deal
00:21:15.560 | But you can't do that when you're young I
00:21:18.400 | Like to read biographies and autobiographies and I remember it
00:21:23.020 | Well, which one to use let's use as an example Warren Buffett the book snowball
00:21:27.480 | Which was one of the more recent comprehensive biographies. It was written on Warren Buffett
00:21:31.200 | I like to use Warren Buffett just simply because he's well known in our society and it's good to use learn lessons from him
00:21:35.680 | In many ways though. He's kind of pull a very polarizing figure, but he's an easy person to pick on since everyone knows about him
00:21:42.760 | it's a little harder to you know pull something from the life of Benjamin Franklin or Thomas Edison and and
00:21:47.800 | Henry Ford or Andrew Carnegie or
00:21:50.920 | Rockefeller and be able to apply the same lessons, but because Buffett is this living figure
00:21:56.300 | I often will use him but because people know a little bit of his history
00:22:00.320 | But one of the things that really has impressed me about
00:22:03.760 | Buffett
00:22:07.060 | When I read snowball and I think I read another biography I can't remember the name of it as well but is
00:22:12.280 | Buffett's always been rich since he was a kid now not accusing him of
00:22:19.240 | You know being handed money he wasn't
00:22:25.600 | But he's always been rich
00:22:27.600 | he just never bothered to spend it and
00:22:30.560 | He's simply old now and has had lots of years of compounding. That's why he's as rich as he is
00:22:35.680 | If you go back and you read his biography, it's fascinating how at a young age
00:22:40.600 | What was it? I think it was cokes or something like that
00:22:43.400 | He was buying bottles of cokes for 10 cents and selling them to his friends at school for 15 cents
00:22:48.840 | He was running a paper route. He and a buddy of his started
00:22:52.920 | I think it was a pinball machine business when they were in high school by the time he went to college
00:22:57.440 | He had lots of money compared to everyone else around
00:23:00.160 | But he'd earned it all himself and he'd saved he just never spent it
00:23:03.520 | Another thing most people don't realize is that he was rich all through his life
00:23:08.040 | he just was focused on his investment earnings and
00:23:11.080 | keeping his capital to invest
00:23:14.080 | so
00:23:16.200 | Which I respect him for that. That's awesome
00:23:18.420 | That's what all of us should be doing
00:23:20.040 | But if he had just earned all his money on a paper route and it never top piled any of it aside
00:23:24.520 | Then when he goes to college, he's got tens of thousands of dollars
00:23:27.280 | Well, he would have had to figure out a way to earn those tens of thousands of dollars again
00:23:30.720 | And if he hadn't been rich when he got married
00:23:32.840 | He would have been in the situation that many of us are in or we're not rich and now we're figuring out
00:23:37.480 | How do we juggle family responsibilities and building money?
00:23:40.280 | Some building capital so much easier if you hang on to your to your to your money at a young age and build that that money
00:23:48.360 | But in the end again doesn't matter a bit to Warren Buffett's net worth if he you know
00:23:53.280 | Buys planes and yachts and all that stuff. It doesn't make a dent
00:23:56.640 | So understand where you are in the compounding cycle number four in the beginning the amount you save matters more than the interest
00:24:05.040 | In the beginning the amount you save matters more than the interest
00:24:11.400 | This is kind of the corollary of in the beginning. It's easy to spend
00:24:16.920 | In scenario in any scenario and in the scenario of
00:24:19.760 | This comp magic penny and again, I talked about if you're behind, but he did just save the other extra five bucks
00:24:25.360 | What if instead of starting with one cent this person has started with in this magic penny this person started with one dollar
00:24:31.680 | Let's just see what that does stick a dollar in here. Well the end of 30 day 31 days there would be
00:24:38.080 | Billions, okay. So 1 billion seventy three million seven hundred forty one thousand dollars. It's a big difference
00:24:45.880 | from one cent to a dollar
00:24:47.880 | We'll come to that at the end of the show
00:24:49.560 | We'll talk a little bit about large numbers and how hard they are for us to conceive of
00:24:53.120 | My major point here is just simply that in the beginning of building wealth the amount that you save matters more than the interest
00:25:00.840 | if you are getting started focus single-mindedly on how much you're saving and
00:25:08.400 | Figure out the interest how you're gonna invest it
00:25:11.520 | next
00:25:14.240 | This matters hugely
00:25:16.240 | One major mistake that I see a lot of times in personal finance is that
00:25:21.520 | Young people who aren't saving that much money are spending all kinds of time and focus on figuring out
00:25:27.840 | How do I eke out a better rate of return? I discovered this in college
00:25:31.680 | When you know friends are figuring out how do I trade futures or how do I?
00:25:36.320 | Trade options or how do I buy this magic stock that's gonna break through the barrier. Does that matter it does if it works
00:25:44.240 | But comparatively speaking to saying how can I earn more so that I can save more that should be the first focus
00:25:49.960 | now on the flip side
00:25:52.920 | This is actually number five in the end of a compounding growth. The interest matters more than the amount you save
00:25:58.980 | So this has its own lessons, but the major personal finance lessons number four is
00:26:05.200 | Focus at the beginning on piling up a big nest egg
00:26:09.880 | Because remember you can it's relatively easy to catch up to compounding for the first half of the chart
00:26:14.080 | On the back half of the chart is hard to it's hard to catch up
00:26:18.120 | So focus first on the amount now on the flip side number five in the end the interest matters more than the amount and this
00:26:23.040 | Is another mistake that I see a lot of times people making in their wealth building portfolios
00:26:27.920 | Let's assume that
00:26:30.920 | You are 65 years old and
00:26:36.680 | Let's assume just for the sake of having a clean point of comparison. Let's assume that we can pull you have an extra million dollars
00:26:44.440 | Because many of you who are in this audience do have an extra million or you will have an extra million at the age of 65
00:26:51.440 | the challenge with growing older is often that you're advised to have your portfolio structured more conservatively and
00:26:59.440 | That is correct. If that portfolio is funding a specific income need
00:27:05.160 | You have to have a portfolio's risk tolerance matched to the needs of income from it
00:27:10.500 | So if you just have a million dollars and that's gonna be your entire portfolio to last you through a 30 or 40 year retirement
00:27:17.000 | Man, you it's hard
00:27:18.480 | You can't afford to take a lot of risk now depending on how we're finding risk in terms of inflation risk or market risk
00:27:23.520 | Conversation for another day point is we can't take much risk
00:27:26.520 | That's why you see these things these, you know, generic standardized ideas that as you get older make your portfolio more conservative
00:27:34.360 | What's the problem?
00:27:36.360 | you're in those golden years at which you've got a massive portfolio and
00:27:41.160 | The single biggest factor that's going to affect the growth of your portfolio is not whether you're pinching pennies at the $2 buffet
00:27:48.360 | It's what's the interest rate at which my portfolio was invested
00:27:52.820 | Let's give an example. So now let's go you're at 65 years old
00:27:57.480 | So let me give you a 30 year investment time horizon a million dollar portfolio
00:28:01.320 | So let's put in a million dollars for our present value. Let's put in a let's say a 5% rate of return to start with
00:28:07.920 | Zero payments and what's that worth at the end of 30 years?
00:28:10.880 | So zero payments because you're not contributing any more to it four point three million dollars at five percent interest
00:28:16.360 | That's what the ending value of your portfolio would be and I could do these calculations where you're pulling off income and show the income
00:28:23.000 | Growth but I want to keep it simple for podcast math here 30 years one million dollars at five
00:28:28.520 | What I use five percent five percent grows to four point three million dollars. Now, let's say that you could in ten percent
00:28:34.360 | What's the difference there?
00:28:36.080 | with the event of 30 years
00:28:38.080 | You have 17 million four hundred and forty nine thousand dollars
00:28:43.400 | at ten percent
00:28:46.280 | Why?
00:28:48.000 | Because you're starting with a million bucks
00:28:50.000 | The 30 years still matters, but you're not starting with zero like you were in a younger age
00:28:55.040 | You got a million dollars and this is fundamentally one of the biggest mistakes that so many people are making with their portfolios is
00:29:01.320 | Automatically going it's quote-unquote safer more conservative giving up potential return
00:29:06.760 | With their portfolios now safety matters. Don't don't hear don't mishear me safety matters
00:29:13.120 | You've got to match the income from a portfolio to the income cash flow requirements that you need in your life
00:29:20.320 | But if you have an extra million bucks and you don't need to automatically give up potential return
00:29:26.240 | Think of the impact that can make on your family. Think of the impact that can make just think of the impact the money can make
00:29:34.420 | It's why the rich get richer all the time
00:29:38.040 | It's because you reach a certain point at which you can't possibly spend all the money
00:29:43.160 | Well, I guess maybe it's a little excessive you reach a certain point at which it's very hard and it takes great dedication and effort
00:29:49.760 | to spend
00:29:51.760 | Twelve percent I want to put this in here. Let's say twelve percent on my example thirty years of investing thirty million dollars
00:29:59.680 | So you say why is it that you know all rich people don't just simply hire
00:30:04.560 | Put all their money in an index fund like Jack Bogle says maybe they should who knows all let them decide
00:30:09.680 | But if you can get from ten percent to twelve percent or let's just say fifty. So let me
00:30:15.440 | Maybe run this so I'd make sure I get my numbers precise ten percent here future value of ten percent million dollars invested over thirty
00:30:21.840 | Years is seventeen point four million dollars twelve percent
00:30:24.880 | Invested over thirty years. It's thirty million dollars
00:30:28.760 | fifteen percent
00:30:31.520 | over thirty years
00:30:33.040 | Sixty-six million dollars so it starts to get a little bit laughable
00:30:36.280 | But the point is towards the back end of your investment career
00:30:39.880 | However long that is the rate of return matters far more than the amount of money you put aside
00:30:45.360 | So now if you take this to society and you compare this lesson
00:30:49.680 | What is the mistake that you see you see at a young age many people squandering all of their investment capital?
00:30:54.800 | Using it up in consumption instead of an investment. And again, I'm guilty of this myself in so many ways
00:31:01.280 | We all have to decide how are we gonna apply these lessons?
00:31:04.800 | But just as a general rule, what do young people do at the beginning of their life?
00:31:08.360 | They consume
00:31:10.120 | They consume
00:31:12.040 | Whether it's you're a teenager and you can as I was a fool
00:31:15.040 | you know and consume all my money on a movie ticket and you know stuff or whether you consume it all on on travel or
00:31:22.720 | Being a heavy drinker and going out every Friday and Saturday night and you know blowing 150 bucks on your weekly bar tab
00:31:29.560 | Whether you consume it on a fancy-looking car or whether you assume consume it on a fancy-looking house
00:31:34.480 | Or whether you consume it on exotic vacations or whatever most of the time in our society when people have money they consume it early
00:31:41.720 | They consume it
00:31:45.280 | That's the time at which it needs to be invested
00:31:48.360 | Now the other major mistake, let's say that you've accumulated some capital. What do many people do with capital?
00:31:53.760 | well, they pull back on their potential rates of return and
00:31:57.640 | That destroys the potential of that capital and they walk away many people from millions of extra potential dollars
00:32:05.120 | Just recognize that
00:32:09.000 | None of these things can be applied in a vacuum of an individual situation
00:32:13.840 | But it's useful to have as a mental construct when you come and you look at your situation
00:32:18.760 | You say where am I and what can I do?
00:32:20.760 | And that's the key is the app is how to apply it
00:32:24.920 | the key is
00:32:27.560 | Get compounding and get compound interest working on your side
00:32:30.360 | no matter how
00:32:33.480 | The cool thing is compounding and compound interest is already working on our sides. We're all enjoying the benefits of compounding
00:32:40.040 | We're all enjoying it already, let me give you an example
00:32:45.040 | This is why it frustrates me that we don't recognize it
00:32:48.240 | I'm just starting to read and I actually want I'd wanted to do this show before I read the books
00:32:52.440 | I knew that if I read the book I was my opinions were gonna be colored
00:32:55.200 | But I'm just starting to read Peter Thiel's new book. Excuse me, Peter Diamandis
00:32:58.840 | Do you mean I don't know how you say his last name Diamondis is D. Amanda's his last name
00:33:03.040 | he's the guy who
00:33:05.520 | started the
00:33:06.720 | the X Prize not Peter Thiel, excuse me, and
00:33:09.680 | Peter D. Amanda's has this new book called
00:33:12.720 | Bold how to go big create wealth and impact the world and what's interesting to me is it's very fascinating because it's very technologically focused
00:33:19.840 | So I just was I got the book and I was flipping through it
00:33:22.820 | Just look real quick at a quick overview of what it's about and he has this really interesting chart that fascinates me
00:33:28.900 | And it's basically the application of Moore's law Moore's law, which is over a certain period of time
00:33:34.240 | the computing power of
00:33:36.960 | chips of the
00:33:39.240 | Microprocessor doubles and and the price halves. I think it's 18 months. I forget what's what the specific specifics of it are
00:33:45.520 | But basically everything over time gets cheaper and with everything technology related
00:33:49.660 | gets cheaper and
00:33:52.080 | Better with a massive scale and this has been held consistent for decades now and it's fascinating but
00:33:58.800 | He puts in here a chart and evidently this is from his book abundance
00:34:03.080 | And he says that there are over nine hundred thousand dollars worth of applications that come free and included in every smartphone today
00:34:10.520 | And think about this the majority of you listening to me are listening on a smart device of some kind smartphone
00:34:16.300 | Think about all these applications
00:34:19.280 | Number one video conferencing and today's dollars it today's world. It's free. It's free
00:34:24.320 | It's included whether it's on Skype or whether it's in FaceTime or whatever the I don't know what the Android equivalents of that are
00:34:30.240 | in 1982
00:34:32.600 | compression labs video conferencing had a
00:34:34.840 | MSRP of two hundred and fifty thousand dollars if you bring that forward into
00:34:39.760 | 2011 dollars, that'd be five hundred eighty six thousand dollars was how much it costs to do video conferencing in 1982
00:34:46.880 | GPS today included in your phone free
00:34:49.600 | Nav star in 1982 sold it for a hundred nineteen thousand dollars adjusted for inflation is two hundred eighty thousand dollars
00:34:56.520 | digital voice recorder today free
00:34:59.440 | Sony PCM in 1978 sold it for twenty five hundred dollars and a two thousand eleven dollars. That's equivalent of eight thousand six hundred eighty seven dollars
00:35:08.020 | digital watch
00:35:10.400 | free
00:35:11.600 | Seiko 1969 twelve hundred fifty dollars five megapixel camera today free
00:35:16.880 | 1986 Canon
00:35:19.560 | RC 701 three thousand dollars MSRP a medical library today free
00:35:24.640 | Example here was a I guess a library called consultant 1987 cost up to two thousand dollars video player today free
00:35:32.980 | 1981 Toshiba v8 thousand twelve hundred forty five dollars video camera today free RC a CC 0 1 0
00:35:40.920 | 1981 thousand dollars MSRP music player free
00:35:43.960 | Sony Sony CD player 1982 nine hundred dollars encyclopedia today free
00:35:49.800 | 1989 Compton CD encyclopedia seven hundred fifty dollars video game console free Atari
00:35:56.720 | 2600 to 2600 in 1977 cost $200
00:36:01.000 | He total all that up and in inflation adjusted dollars and it's worth over nine hundred thousand dollars
00:36:05.320 | And those are just the applications that come standard in a phone
00:36:10.280 | Isn't that incredible
00:36:12.280 | Now you still obviously still have to buy the phone
00:36:15.160 | So it's not technically free you have to buy the device
00:36:18.200 | But if you noticed how cheap those devices are getting and how the performance is going up. That's the application of Moore's law
00:36:24.840 | I'm sure I'm gonna I mean
00:36:25.680 | This is a subject that fascinates me because I see it happening all through our society and changing anything
00:36:30.880 | That's touching being touched by digits is is is subject to Moore's law
00:36:35.000 | It's getting cheaper and better constantly cheaper better constantly cheaper better cheaper better cheaper better cheaper better cheaper better
00:36:40.120 | And it doesn't show any signs of slowing
00:36:42.360 | It's revolutionizing the world we live in
00:36:45.320 | Why did I go into that reason I went into that was because we're all already enjoying those benefits
00:36:51.560 | The fact that you're hearing me right now on a podcast this was not possible without great
00:36:58.280 | technological acumen five years ago today
00:37:02.640 | Free and easy every one of you knows how to go to the App Store
00:37:05.400 | Everyone I want to be knows how to tell someone go to the App Store and search radical personal finance
00:37:09.760 | And you can listen to my voice no matter where you are
00:37:11.760 | So enjoy the benefits of company that are happening in society and compounding happens in every area of life
00:37:18.800 | We focus primarily on money, and I think that's valuable
00:37:23.080 | But as I close I want you to think about applying this to other areas of your life after I prepared this
00:37:30.080 | This outline I went and pulled
00:37:32.080 | Book off my shelf by Darren Hardy called the compound effect, and this is one of the best simplest little books
00:37:38.360 | That was so helpful
00:37:39.880 | And I went and pulled this because I thought he did a good job in here and what's funny is he started with the magic
00:37:44.800 | penny
00:37:46.040 | He started with the magic penny, and then he went into this example here of how compounding happens in every area
00:37:51.600 | I'm gonna every area of life, and I'm gonna read to you
00:37:54.280 | It's about six five pages here from this book where he's talking about the impact of compounding in other areas other than finance
00:38:01.800 | This happens in your job this happens in your knowledge happens your health
00:38:05.520 | There's so many areas of which we can experience compounding, but consider this and consider those examples
00:38:11.360 | I'm reading from page 11 highly recommend this book to you a lot of you
00:38:14.240 | I need to prepare a recommended reading reading list. This is a great one
00:38:17.520 | It's just called the compound effect get it and read it, but page 11 here
00:38:21.680 | Three friends let's take three buddies who all grew up together
00:38:24.320 | They live in the same neighborhood with very similar sensibilities each makes around fifty thousand dollars a year
00:38:29.800 | They're all married and have average health and body weight plus a little bit of that dreaded marriage flab
00:38:35.440 | Friend number one let's call him Larry plods along doing as he's always done
00:38:40.760 | He's happy or so he thinks but complains occasionally that nothing ever changes
00:38:45.880 | Friend number two Scott starts making some small
00:38:50.280 | seemingly
00:38:51.800 | inconsequential positive changes
00:38:53.800 | He begins reading ten pages of a good book per day and listening to 30 minutes of something instructional or inspirational on his commute to work
00:39:01.680 | Scott wants to see changes in his life, but doesn't want to make a fuss over it
00:39:06.120 | He recently read an interview with dr. Mehmet Oz and success magazine and chose one idea from the article to implement in this life
00:39:12.720 | He's going to cut
00:39:14.880 | 325 calories from his diet every day no big deal
00:39:18.240 | We're talking maybe a cup of cereal less trading that can of soda for a bottle of seltzer
00:39:22.960 | Switching from mayo to mustard on his sandwich
00:39:25.880 | Doable he's also started walking a couple thousand extra steps per day less than a mile
00:39:31.400 | No, grand acts of bravery or effort stuff anyone could do
00:39:36.280 | But Scott is determined to stick with these choices knowing that even though they're simple he could also easily be tempted to abandon them
00:39:45.240 | Friend number three Brad makes a few poor choices
00:39:48.760 | He recently bought a new big-screen TV so he can watch more of his favorite programs
00:39:53.560 | He's been trying out the recipe he's recipes he's seen on the food channel the cheesy casseroles and desserts are his favorites
00:40:00.640 | Oh
00:40:01.720 | And he installed a bar in his family room and added one alcoholic drink per week to his diet nothing crazy
00:40:08.240 | Brad just wants to have a little more fun at the end of five months
00:40:13.400 | no
00:40:14.800 | perceivable differences exist among Larry Scott or Brad
00:40:19.560 | Scott continues to read a little bit every night and listen to audios during his commute Brad is enjoying life and doing less
00:40:26.960 | Larry keeps doing as he has always as he always has
00:40:30.640 | Even though each man has his own pattern of behavior
00:40:33.880 | Five months isn't long enough to see any real decline or improvement in their situations
00:40:40.200 | In fact, if you charted the three men's weights, you'd see a rounding error of zero
00:40:45.800 | They'd look exactly equal at the end of ten months. We still can't see noticeable changes in any of their lives
00:40:53.240 | It's not until we get to the end of the 18th month that the slightest differences are measurable in these three friends appearances
00:41:00.720 | But at about month 25, we start seeing really measurable
00:41:07.200 | Invisible differences at month 27. We see an expansive difference and by month 31 the change is startling
00:41:14.200 | Brad is now fat while Scott is trim by simply cutting
00:41:19.440 | 125 calories a day in 31 months Scott has lost 33 pounds
00:41:24.920 | The math here 31 months equals 940 days 940 days times 125 calories a day is a hundred and seventeen thousand five hundred
00:41:34.720 | Calories saved hundred seventeen thousand five hundred calories saved times one pound which has thirty five hundred calories is thirty three and a half pounds
00:41:42.240 | That's the math
00:41:43.600 | Brad ate only 125 calories more a day in that same time frame and gained
00:41:48.760 | 33.5 pounds now he weighs
00:41:52.240 | 67 pounds more than Scott, but the differences are more significant than weight Scott's invested almost
00:41:59.280 | 1,000 hours reading good books and listening to self-improvement audios by putting his newly gained knowledge into practice
00:42:05.140 | He's earned a promotion and a raise best of all his marriage is thriving
00:42:08.680 | Brad he's unhappy at work and his marriage is on the rocks and Larry
00:42:13.360 | Larry is pretty much exactly where he was two and a half years ago except now he's a little more bitter about it
00:42:19.680 | The phenomenal power of the compounding effect is that simple the difference between people who employ the compound effect for their benefit
00:42:27.400 | Compared to their peers who allow the same effect to work against them is almost inconceivable
00:42:32.240 | It looks miraculous like magic or quantum leaps
00:42:36.900 | After 31 months or 31 years the person who uses the positive nature of the compound effect appears to be an overnight success
00:42:44.960 | And reality his or her profound success was the result of small smart choices
00:42:51.280 | completed consistently over time
00:42:54.920 | The results in the above example seem dramatic. I know but it goes even deeper than that
00:42:59.320 | the reality is that even one small change can have a significant impact that causes an unexpected and
00:43:05.680 | Unintended ripple effect. Let's put one of Brad's bad habits under the microscope
00:43:09.880 | eating rich food more frequently to better understand how the compound effect can also work in a negative way and can create a ripple effect
00:43:17.760 | That impacts your entire life
00:43:20.120 | Brad makes some muffins from a recipe he learned from the food channel
00:43:23.380 | He's proud and his family loves it and it seems to add value all around
00:43:27.880 | He starts making them and other sweets frequently. He loves his own cooking and eats more than his share, but not so much that anyone notices
00:43:35.520 | However, the extra food makes Brad sluggish at night
00:43:39.340 | He wakes up a little groggy which makes him cranky the crankiness and sleep deprivation begin to impact his work performance
00:43:46.160 | He's less productive and as a result gets discouraging feedback from his boss by the end of the day
00:43:51.560 | He feels dissatisfied with his job and his energy level is way down
00:43:55.640 | The commute home seems longer and more stressful than ever. All of this makes him reach for more comfort food
00:44:02.560 | Stress has a way of doing that
00:44:05.360 | The overall lack of energy makes Brad less likely to take walks with his wife like he used to he just doesn't feel like it
00:44:11.900 | She misses their time together and takes his withdrawal personally
00:44:15.840 | With fewer shared activities with his wife and an absence of fresh air and exercise
00:44:20.540 | Brad's not getting the endorphin release that had helped make him feel upbeat and enthusiastic
00:44:26.480 | Because he's not as happy he starts finding fault with himself and others and stops complimenting his wife as his own body starts to feel
00:44:34.400 | Flabby, he feels less self-confident less attractive and becomes less romantic
00:44:40.040 | Brad doesn't realize how his lack of energy and affection toward his wife affects her
00:44:45.400 | He just knows that he feels funky. He starts losing himself in late-night TV because it's easy and distracting
00:44:52.080 | Feeling his distance Brad's wife starts to complain then becomes needy
00:44:56.960 | When that doesn't work, she emotionally withdraws to protect herself
00:45:01.720 | She's lonely. She pours her energy into her work and spends more time with her girlfriends to fulfill her need for companionship
00:45:09.000 | Men start flirting with her which makes her feel desirable again
00:45:13.720 | She would never cheat on Brad, but he has a feeling something's wrong
00:45:16.760 | Instead of seeing that his poor choices and behaviors are at the root of their problems. He finds fault with his wife
00:45:23.160 | Believing that the other person is wrong rather than looking inside and doing the work necessary to clean up your messes
00:45:29.960 | Basic psychology 101 stuff and Brad's case. He doesn't know know to look inside
00:45:35.240 | They don't offer self-improvement or relationship advice on Top Chef or his favorite crime shows
00:45:41.080 | However, the thought may have occurred to him that if he had read
00:45:46.520 | The thought may have occurred to him that if he had read the personal development books his buddy Scott reads
00:45:51.960 | He might have learned about ways to change negative habits
00:45:54.840 | Unfortunately for Brad the small choices he made on a daily basis
00:45:59.520 | Created a ripple that wreaked havoc on every area of his life
00:46:04.880 | Of course all that calorie counting and intellectual stimulation has had the opposite effect with Scott who is now reaping the bounty of positive
00:46:12.760 | Results, it's that simple
00:46:15.120 | With enough time and consistency the outcomes become visible
00:46:20.080 | Better yet. They're totally predictable
00:46:23.040 | The compound effect is predictable and measurable. That's great news
00:46:28.080 | Isn't it comforting to know that you only need to take a series of tiny steps?
00:46:32.600 | Consistently over time to radically improve your life
00:46:35.440 | Doesn't that sound easier than mustering up some grand show of bravery and heroic strength only to wear yourself out and have to drum up
00:46:43.600 | All that energy again at a later date for another try which will likely be unsuccessful
00:46:47.440 | I'm exhausted just thinking about it, but that's what people do
00:46:51.680 | We've been conditioned by society to believe in the effectiveness of a great display of massive effort. It's downright all-american
00:47:00.560 | The most challenging aspect of the compound effect is that we have to keep working away for a while
00:47:06.200 | consistently and efficiently
00:47:09.120 | Before we can begin to see the payoff
00:47:12.240 | Our grandparents knew this though
00:47:15.080 | They didn't spend their evenings glued to the TV watching infomercials about how to have thin thighs in 30 days or a real estate kingdom
00:47:22.200 | In six months, I bet your grandparents worked six days a week from sunup to sundown
00:47:27.560 | Using the skills they learned in their youth and repeatedly throughout their entire life
00:47:32.080 | They knew the secret was hard work
00:47:35.720 | discipline and good habits
00:47:38.720 | It's interesting that wealth tends to skip a generation
00:47:41.920 | Overwhelming abundance often leads to a lackadaisical mentality which brings about a sedentary lifestyle
00:47:47.400 | Children of the wealthy are especially susceptible
00:47:50.400 | They weren't the ones who developed the discipline and character to create the wealth in the first place
00:47:55.040 | So it makes sense that they may not have the same sense of value for wealth or understand what's necessary to keep it
00:48:02.360 | We frequently see this entitlement mentality in children of royalty
00:48:06.760 | movie stars and corporate executives and to a lesser degree in children and adults everywhere
00:48:13.240 | As a nation our entire populace seems to have lost appreciation
00:48:18.120 | For the value of a strong work ethic
00:48:23.360 | We've had two if not three generations of Americans who have known great prosperity
00:48:27.920 | wealth and ease
00:48:30.800 | Our expectations of what it really takes to create lasting success
00:48:34.320 | Things like grit hard work and fortitude aren't alluring and thus have been mostly forgotten
00:48:41.680 | We've lost respect for the strife and struggle of our forefathers the massive effort they put forth and still discipline
00:48:49.280 | Chiseled their character and stoked the spirit to brave new frontiers
00:48:54.920 | The truth is complacency has impacted all great empires
00:48:59.280 | Including but not limited to the Egyptians Greeks Roman Spanish Portuguese French and English. Why?
00:49:05.780 | Because nothing fails like success
00:49:09.280 | once dominant empires have failed for this very reason people get to a certain level of success and
00:49:16.000 | Get too comfortable
00:49:18.800 | Having experienced extended periods of prosperity health and wealth we become complacent
00:49:24.400 | We stopped doing what we did to get us there
00:49:28.360 | If we want to succeed we need to recover our grandparents work ethic
00:49:32.760 | It's time to restore our character if not for the sake of saving America at least for your own greater success and achievement
00:49:39.640 | Don't buy into the genie-in-a-lamp idea
00:49:42.320 | You can sit on your couch waiting to attract checks in your mailbox rub crystals together walk on fire
00:49:48.000 | Channel that two thousand year old guru or chant affirmations if you want to but much of that is hocus-pocus
00:49:53.920 | commercialism
00:49:55.880 | Manipulating you by appealing to your weaknesses
00:49:58.360 | real and lasting success requires work and
00:50:02.360 | Lots of it. I have a quick real-time story to illustrate this nothing fails like success concept a great new restaurant
00:50:10.000 | Opened up close to my home on the beach in San Diego in the beginning
00:50:13.400 | The place was always immaculate the hostess had a big welcoming smile for everyone the service was impeccable
00:50:19.080 | The manager came over and assured it and the food was sensational
00:50:23.600 | Soon people started lining up to eat there and would often wait more than an hour to be seated
00:50:28.200 | Then unfortunately the restaurant staff began to take its success for granted
00:50:33.000 | The hostess became snooty the service staff disheveled and curt and the food quality hit or miss
00:50:39.440 | The place was out of business within 18 months
00:50:43.040 | They failed because of their success or rather because they stopped doing what made them successful to begin with
00:50:50.360 | Their success clouded their perspective and they slacked off
00:50:54.460 | Understanding the compound effect will rid you of
00:50:57.720 | Insta results expectation the belief success should be as fast as your fast food your one-hour glasses your 30-minute photo processing your overnight mail
00:51:05.760 | Your microwave eggs your instant hot water and text messaging enough, okay?
00:51:10.840 | promise yourself that you're going to let go once and for all of your lottery winner expectations because
00:51:16.400 | Let's face it. You only hear stories about the one winner not the millions of you losers
00:51:23.200 | The person you see jumping up and down in front of the Vegas slot machine or at the Santa Anita horse track
00:51:29.040 | Doesn't reveal the hundreds of times that same person lost if we go back to our mathematical chance of a positive result
00:51:37.240 | Again, we have a rounding error of zero as in you have about zero chance of winning
00:51:43.480 | Harvard psychologist Daniel Gilbert author of stumbling on happiness says that if we gave lottery losers each 30 seconds on TV to announce not I
00:51:52.240 | Won, but I lost it would take almost nine years to get through the losers of a single drawing
00:51:58.560 | When you understand how the compound effect works you won't pine for quick fixes or silver bullets
00:52:04.960 | Don't try to fool yourself into believing that a mega successful athlete didn't live through regular
00:52:10.220 | Bone crushing drills and thousands of hours of practice
00:52:13.760 | He got up early to practice and kept practicing long after all others had stopped
00:52:18.520 | He faced the sheer agony and frustration of the failure
00:52:22.800 | loneliness hard work and
00:52:25.440 | Disappointment it took to become number one
00:52:29.760 | By the end of this book or even before I want you to know in your bones that your only path to success
00:52:35.000 | Is through a continuum of mundane?
00:52:38.080 | unsexy
00:52:40.520 | Unexciting and sometimes difficult daily disciplines compounded over time
00:52:45.440 | Know too that the results the life and the lifestyle of your dreams can be yours
00:52:52.200 | When you put the compound effect to work for you
00:52:58.120 | It's probably a good sales pitch for the for the book right if you can't tell it's a good one
00:53:02.600 | Haven't read it in at least three or four years probably since it came out
00:53:06.000 | I bought it right when it came out and I just pulled it off the shelf this morning and said I want
00:53:09.920 | X I remembered his example and I wanted to find it
00:53:12.540 | It's a good it's a good book highly recommended that's the compound effect
00:53:17.840 | Now just knowing it isn't enough, you know, I've known that for a long time
00:53:22.380 | But you know for me
00:53:24.960 | When I apply I am applying the compound effect and radical personal finance and some of my business ventures in lots of things
00:53:32.000 | But is it just because I apply it in one area doesn't mean I'm applying in all the other areas for me
00:53:36.660 | My weakness is my own physical health, you know fat and flabby and weak
00:53:41.720 | I'm working on that. I've got been getting some help and I'm working hard on that to apply it
00:53:47.600 | But I've realized even for me and I'm just sharing with you as one person who's learning alongside you
00:53:53.600 | I'm not an expert on these things. I'm an amateur and
00:53:57.040 | even for me just simply recognizing that
00:54:00.800 | Nothing comes in 30 days
00:54:04.800 | I'm learning even more I've learned a little bit over the years, but I'm learning even more to train myself to completely ignore overnight
00:54:12.780 | So called success stories
00:54:15.640 | Because I can't control that
00:54:18.880 | Yeah, maybe somebody else can lose 80 pounds in 60 days and build 50 pounds of muscle
00:54:23.640 | But I'm not sure that I can control that maybe I can this goes back to
00:54:27.440 | This goes back to just the principles of investing you have to hold these things together. They're seemingly disconnected, but they're together
00:54:33.400 | All I can control is do I work do I save do I put my money in and do I make wise choices?
00:54:39.960 | And am I making as wise of a choice as I possibly can I can't necessarily control this one
00:54:47.320 | Investment is gonna multiply a hundredfold. It's possible
00:54:50.220 | All I can control though is that I'm making wise choices and I'm putting money in and I'm investing same thing in any area of life
00:54:57.140 | Maybe we do respond better and that's when you do get the overnight successes so-called
00:55:02.280 | But as he points out the athlete who walks into a 10 million dollar contract, they didn't walk in there
00:55:07.560 | There were years of hard work in their backstory
00:55:12.400 | years
00:55:14.880 | Learn the lessons of the magic penny apply them in your own life and get compounding working to you
00:55:19.840 | That's the core of what I wanted to cover in today's show. I hope it's useful to you
00:55:24.720 | I hope you can take these concepts and build on them
00:55:28.000 | Remember we all don't feel bad if you're behind in something
00:55:32.640 | I hate that how oftentimes people look at these charts or hear about compound interest they throw up their hands
00:55:38.080 | The point is not to throw up your hands, but to start wherever you are
00:55:40.320 | You know going on my health example. I've failed for years
00:55:44.760 | At health I've waffled all over the place. Does it do me any good?
00:55:48.120 | To sit back and focus on that doesn't do me a bit of good
00:55:52.240 | What does me good is to wake up and say I'm gonna start again, and I'm not gonna quit
00:55:57.240 | Same thing for you whether it's money health marriage career
00:56:00.560 | Anything in life
00:56:03.880 | Grows over time and as example with Larry and the other two guys Brad and whomever
00:56:09.620 | You can't see it the effects in the first place
00:56:13.120 | You know with the show I can't see the effects all I can do is show up and do my best
00:56:17.960 | But over time I get better people hear about it. You start to get the compounding effect
00:56:22.560 | So what is it? Where are you applying the compounding effect in your life?
00:56:25.240 | That's the core
00:56:27.880 | So that's it. Thank you so much for listening if you have gotten benefit from this
00:56:32.960 | I would ask you to consider supporting the show on patreon as of right now
00:56:37.380 | We are up to 44 patrons and six hundred and three dollars per month
00:56:41.120 | So we're over 25% of the way there to our initial goal of two thousand dollars per month at two thousand dollars per month
00:56:47.800 | We swap out the intro music probably keep this for the outro
00:56:50.800 | Can't beat it right, but I'll swap out the intro music for a better intro
00:56:56.560 | We're on our way to six thousand dollars per month by June 1
00:56:59.480 | That's the major goal if we can get six thousand dollars a month for the show by June 1. I will avoid
00:57:04.040 | advertisers and corporate
00:57:06.720 | Sponsors and interests for the duration of the show if we can't get to sit there by June 1
00:57:11.240 | I will need to go ahead and bring on some sponsors to make the show pay for itself
00:57:15.240 | A little bit better so that I can continue doing it
00:57:18.360 | Or at least doing it with the regularity and the frequency that I'm currently applying towards it
00:57:22.880 | But I really love to avoid that if every listener to the show gave two bucks a month
00:57:26.040 | We'd be done we'd be at six thousand a month. So consider going to radical personal finance comm slash patron and
00:57:32.920 | Patronize the show. I thank you so much. Thank you so much for listening. We'll be back with you tomorrow
00:57:36.760 | Thank you for listening
00:57:42.200 | If you'd like to contact me personally, my email address is Joshua at radical personal finance comm
00:57:49.140 | You can also connect with the show on twitter at radical PF and at facebook.com slash radical personal finance
00:57:56.260 | This show is intended to provide entertainment
00:57:59.520 | education and
00:58:02.080 | financial enlightenment
00:58:03.840 | But your situation is unique and I cannot deliver any actionable advice without knowing anything about you
00:58:11.080 | please
00:58:12.960 | Develop a team of professional advisors who you find to be caring
00:58:17.620 | competent and trustworthy and
00:58:20.400 | Consult them because they are the ones who can understand your specific needs
00:58:26.000 | your specific goals and provide specific answers to your questions
00:58:32.460 | I've done my absolute best to be clear and accurate in today's show
00:58:36.460 | But I'm one person and I make mistakes if you spot a mistake in something
00:58:41.140 | I've said, please help me by coming to the show page and commenting so we can all learn together
00:58:46.460 | Until tomorrow. Thanks for being here