The LA Kings holiday pack is back the perfect gift for the hockey fan in your life a three-game pack starts at just $159 and includes a holiday blanket buy today and you'll receive an additional game for free Don't miss out visit la kings comm slash holiday today Radical personal finance is presented to you free of corporate advertising Thanks to the patrons of the show if the show brings at least a dollar of value per month into your life Please consider becoming a patron go to radical personal finance comm slash patron Today on the show we dig into compound interest and We go through the lessons that we can learn from the magic penny You've heard the example right the magic penny that doubles in value What are the actual lessons of that?

Welcome to the radical personal finance podcast. My name is Joshua sheets, and I'm your host and today is Monday, February 23 2015 If I offer you two choices one is a million dollars cash today or is it a million dollars cash tomorrow? You're gonna have to answer that question.

It's a personal choice, but it's a personal choice for you 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? 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 Or the other is a magic penny that doubles in value every day for a month Which of those would you choose and why?

Now I would guess that for most of you that's not the first time you've ever been asked that question 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 Your first rodeo or whatever. I don't know what you call that in language, whatever saying you want to apply from the South So we talked about turnip trucks and cabbage trucks and rodeos.

I don't know what you New Yorkers talk about But people listen to the show. They're not new to these concepts. And so I'm certain that you've seen this illustration But my next question is what are the lessons that you've taken from this illustration? What are the lessons that you've learned I Want to walk you through five specific lessons in today's show that I think that you can learn from this illustration Now before I get into the specific lessons 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 I'm gonna run through this quickly on the on in audio format 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 But I think it's important and I think I can do it quickly enough that it's not boring but how much money is your magic penny worth at the end of a month a 31 day month any idea Well, let's do the math If you start with one cent on day one and double it each day on day two You have two cents day three four cents day for eight cents day 5 16 cents day 6 32 cents day 764 cents Day eight dollar twenty-eight next 256 five dollars twelve ten dollars twenty four $20 48 forty dollars ninety six and day fourteen.

You're up to eighty one dollars and ninety two cents 163 84 3 27 68 655 36 1310 dollars and 72 cents on day 18 19 is 2006 21 5242 10485 on day 21 20,971 on 22 41943 on 23 $83,886 on day 24 day 25 $1,772 this is the time in the illustration at which if your friend took the million dollars 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 Seven thousand seven hundred seventy two dollars in your account But day 26 you have three thirty five Five forty four three hundred thirty five thousand five hundred forty four dollars day 27 $671,000 and finally on day 28 you cross the million dollar mark 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 day 30 five million three hundred sixty eight thousand and On day 31 your magic penny is now worth ten million seven hundred thirty seven thousand four hundred and eighteen dollars and twenty four cents Ten million seven hundred thirty seven thousand four hundred eighteen dollars and twenty four cents Amazing, huh?

Isn't that incredible? Isn't that absolutely incredible now I Don't want to just spend time thinking about how incredible it is 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 illustration I'm not aware of any investment in the world that I can find to participate in that will double my money Every day for a month.

So this is primarily a thought experiment 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 rate of return matters Rate of return matters big-time To go from one cent to ten point seven million dollars in 31 days is only Possible in a world where your money doubles every year Now can I tell you that There's an investment that you can buy a mutual fund a stock in which your money will double every year certainly not At least not for 31 consecutive periods.

But are there things that you can do financially that will double your money? I Believe there are and you want to make sure that you're taking advantage of those things one of the trends in our society that I see that really concerns me is people have simply assumed that you cannot beat the market and They've assumed this with good reason by the way much of the academic research illustrates that almost nobody can beat the market the problem with that scenario, however, is that that's primarily limited to stock market returns and That is the data is all based upon mutual fund stock market returns because that's where the most reliable data is but there are problems with that data and Also, the other problem is not that nobody can beat the market because that's not what the data says the data says that you can't reliably predict in advance who is going to beat the market and 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 What's interesting is however, there are a bunch of flaws in it and I'm not gonna go into that today But what's happened what I've seen happen in our society as many times people have just simply said well I'm not gonna bother to try then I'm not gonna bother to try to find good investments and This is death to your wealth building.

Let me give a couple examples 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 Investment time horizon. So 40 years and let's run some different interest rates. Let's say we invest Let's do a Roth IRA contributions.

Let's just do let's do $5,000 a year just under the Roth IRA contributions So we're gonna put in $5,000 annually into an investment portfolio over 40 years Starting with nothing and we're gonna calculate what a different rates of return our money is worth at the end of 40 years 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 $475,000 That's big money, isn't it?

I don't know. I mean that's big money Which should give you hope that even if you invest at a relatively low rate of return 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 What if we raise this from 4% to 6% now at the end of 40 years instead of 475 we have $773,000 What if we go from 6% to 8% at the end of 40 years now we have 1 million $212,000 Let's pop this up to 10% and see what we have Well now we have 2 million two hundred and twelve thousand dollars big difference between $475,000 at 4% and 2.2 million dollars at 10% Now question what about 15% 8.8.

It's gonna 8.9 million dollars. It's 8 million eight hundred ninety five thousand dollars What about 20% 20% it's 36 million dollars Rate of return matters Now can I tell you how to get a 20% annualized rate of return in the stock market? I don't have a clue how to do that But I guarantee you there's something in your life where you can get a 20% rate of return It'll be different for everybody but there's something somewhere someplace that you can get a massive rate of return It may simply be a 20% discount on some of the services and expenses that you are already incurring It may be avoiding 20% interest rate credit card debt If there's something in your life where you can get a 20% rate of return Can you do that every year for 30, you know for 40 years?

I don't know probably not but there's some people who have And that's the key some people have usually this is in private enterprise and the growth of business But leave that for another day rate of return matters 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 Right now, where can I put my money to work for me right now in the best most efficient arrangement possible?

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% Annual increases it's hard not to get wealthy Look for those places in your life and take advantage of them Don't ever walk past the 50% off sale and you know be thinking to yourself.

Well, that doesn't matter No, look at it and say that's 50% off. That's the magic penny Don't ever walk past the ways that you can increase money substantially and say it's no big deal 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 next lesson is The amount of time you invest matters You can't escape the influence of time the power of compound interest is driven by What is the rate of return and how long can we get those returns and how much do we start with?

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 Of return and how long we get those returns, but let's go back to the 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 We're falling behind here aren't we that's not much money comparatively speaking Compare ten thousand to a million.

There's a big difference there 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 Then the magic happens Day 27 is six hundred seventy one thousand then on day 28. It's 1 million three hundred forty two thousand day Twenty nine two million six hundred eighty four thousand day thirty five million three hundred and sixty eight thousand and day thirty one ten million seven hundred thirty seven thousand dollars What would have happened if this had been the month of February instead of the month of December in our example?

Well, you'd have 1.3 million dollars and is that Measurably better than a million dollars. Yes $300,000 for 28 days of sitting around I'll take it but it's nowhere near as dramatic as ten million seven hundred thirty seven thousand dollars and That's a key lesson Now there's another example that's often used when teaching people about compound interest that I both like and dislike And that's the example of two different individuals who start investing at different ages And what how this example is usually presented is as an example of two investors side by side and one investor begins investing let's say $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 30 and then starts investing $2,000 per year what you find is that the person who's waits till a later age winds up with investing more money and With less dollars, excuse me, usually the in the person who starts at 18, they usually start investing and then stop So let's let's run a little math here as an example Let's say that you have an 18 year old investor and for this example I'm going to use a 10% interest rate and this person starts $2,000 per year if you started at $2,000 every year from 18 to 65 at a 10% interest rate You would have 1.9 million dollars But now if you compare these two things in this way look at the difference of numbers If our initial investor begins at 18 with $2,000 and contributes for 10 years from 18 through the 23 year 27 He or she invests a total of $20,000 then the money continues to grow and at 65 this person has 1 million $260,000 in Scenario B.

This investor starts investing at 28 invest $2,000 per year every year from 28 to 65 they invest a total of $76,000 and They have in their portfolio only six hundred and sixty thousand dollars Time matters That extra ten years of compounding is huge now compare that to the magic penny That extra four days of compounding is huge Time matters Now what was always frustrating to me about this example And I was inspired by this example when I was young and I started investing when I was 18 years old and said hey I got to put my money aside got to put my money aside got to put my money aside But what's frustrating to me about this chart is no one gives the other side And so I'm gonna do that for you now.

Let's say that you're 28 What do you need to do to catch up? Well at age 28 investor a the one who started at 18 now has $37,000 in their account and then they stop contributing all you need to do if you're 28 to catch up Save $37,000 So if you're 28 years old and you're listening to this Episode and you're about to go out and buy a $37,000 card don't Invest the $37,000 Or if you're age 38, where is investor a at age 38?

Well investor a at age 38 has $96,130 in their portfolio If you're 38 years old and you're feeling behind all you got to do is catch up is invest $96,000 now, is that a lot of money? Sure. Can you find it? Yes If you haven't saved it get started That's the point because from age 38 to age 40 Investor a who started with $2,000 for 10 years the growth in their portfolio goes from $96,000 to $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 Get this thing going for you.

Well 116,000 divided by 3 is $40,000 Can you find a way to save $40,000? Maybe not 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 Can you save 20,000 a year? The point is get started and if you want to catch up It's relatively easy to catch up on this interest chart If you just simply identify where you are and where you want to go and put more money after it Time matters so run these examples of the two individuals the one who has the longer time period and Try to get that time period working on your side And if you're behind don't worry about it just catch up Easy for me to say right lesson number three in the beginning It's easy to spend and that's what most people do.

So let's go back to this magic penny after 10 days of investing One penny doubling each day one cent two cent four cents eight cents sixteen thirty two cents sixty four cents a dollar twenty eight Two dollars fifty six five dollars twelve on day ten. You have five dollars and twelve cents What amiss most people do when they accumulate five dollars and twelve cents?

They spend it To go to their local fast-food store and they buy a value meal It's easy to spend isn't it? What if we go another ten days? 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 twenty seven sixty eight six fifty five thirty six one thousand three ten seventy two Two thousand six twenty one and on day twenty now we have five thousand two hundred and forty two dollars What do most people do when they have five thousand two hundred forty two dollars and eighty eight cents piled up?

Spend it and they drop back 20 days in their interest chart Now, I don't know necessarily what they spend it on five thousand bucks to me sounds like a round-the-world trip ticket That's what I would spend it on some people. It's a down payment on a fancy card some people It's I don't know half of a down payment on a house But they spend it you're a day 20 and you have five thousand two hundred forty two dollars And you spend it not recognizing that in 11 days 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 Every dollar matters in the beginning every single dollar matters in the beginning And the Bible in the book of Zachariah says do not despise the day of small beginnings now that's completely taken out of context, but it's become a Common phrase because it's so useful do not despise the day of small beginnings Don't despise five thousand dollars of capital don't despise five dollars of capital That is your seed capital for your fortune.

That's the seed capital for your empire. Don't despise that and squander it Don't despise the day of small beginnings Many people do that and especially if you're interested in building wealth Remember if all your friends took the million bucks and are spending it you're sitting over here with your five thousand dollars You look a little foolish, don't you?

You look a little foolish You look a little foolish when you're driving your you know, your cheap car 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 But don't worry about it stay focused because in the beginning every dollar is important So easy to spend in the beginning and that's what most people do but that's not you you're not most people Now in the later years you can really siphon off some money without too much damage to your portfolio And this is the corollary Both of these things are exciting and the fullness of time assuming you're around to enjoy the growth of your investments 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 You're well on your way to being a millionaire, you know the next day if you don't take any money off It's gonna be 1 million three hundred and forty two thousand dollars.

You're well on your way Now you want to buy a new car and you want to pull off thirty thousand dollars. Does that measurably impact? Your financial plan not really not comparatively speaking So if you're older and you've got this compound interest working on your side Spend some money.

It doesn't you can spend some money and increase your lifestyle without it measurably impacting your investment results It's a big deal But you can't do that when you're young I Like to read biographies and autobiographies and I remember it Well, which one to use let's use as an example Warren Buffett the book snowball Which was one of the more recent comprehensive biographies.

It was written on Warren Buffett 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 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 it's a little harder to you know pull something from the life of Benjamin Franklin or Thomas Edison and and Henry Ford or Andrew Carnegie or Rockefeller and be able to apply the same lessons, but because Buffett is this living figure I often will use him but because people know a little bit of his history But one of the things that really has impressed me about Buffett When I read snowball and I think I read another biography I can't remember the name of it as well but is Buffett's always been rich since he was a kid now not accusing him of You know being handed money he wasn't But he's always been rich he just never bothered to spend it and He's simply old now and has had lots of years of compounding.

That's why he's as rich as he is If you go back and you read his biography, it's fascinating how at a young age What was it? I think it was cokes or something like that He was buying bottles of cokes for 10 cents and selling them to his friends at school for 15 cents He was running a paper route.

He and a buddy of his started I think it was a pinball machine business when they were in high school by the time he went to college He had lots of money compared to everyone else around But he'd earned it all himself and he'd saved he just never spent it Another thing most people don't realize is that he was rich all through his life he just was focused on his investment earnings and keeping his capital to invest so Which I respect him for that.

That's awesome That's what all of us should be doing But if he had just earned all his money on a paper route and it never top piled any of it aside Then when he goes to college, he's got tens of thousands of dollars Well, he would have had to figure out a way to earn those tens of thousands of dollars again And if he hadn't been rich when he got married He would have been in the situation that many of us are in or we're not rich and now we're figuring out How do we juggle family responsibilities and building money?

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 But in the end again doesn't matter a bit to Warren Buffett's net worth if he you know Buys planes and yachts and all that stuff.

It doesn't make a dent So understand where you are in the compounding cycle number four in the beginning the amount you save matters more than the interest In the beginning the amount you save matters more than the interest This is kind of the corollary of in the beginning. It's easy to spend In scenario in any scenario and in the scenario of This comp magic penny and again, I talked about if you're behind, but he did just save the other extra five bucks What if instead of starting with one cent this person has started with in this magic penny this person started with one dollar Let's just see what that does stick a dollar in here.

Well the end of 30 day 31 days there would be Billions, okay. So 1 billion seventy three million seven hundred forty one thousand dollars. It's a big difference from one cent to a dollar We'll come to that at the end of the show We'll talk a little bit about large numbers and how hard they are for us to conceive of My major point here is just simply that in the beginning of building wealth the amount that you save matters more than the interest if you are getting started focus single-mindedly on how much you're saving and Figure out the interest how you're gonna invest it next This matters hugely One major mistake that I see a lot of times in personal finance is that Young people who aren't saving that much money are spending all kinds of time and focus on figuring out How do I eke out a better rate of return?

I discovered this in college When you know friends are figuring out how do I trade futures or how do I? 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 But comparatively speaking to saying how can I earn more so that I can save more that should be the first focus now on the flip side This is actually number five in the end of a compounding growth.

The interest matters more than the amount you save So this has its own lessons, but the major personal finance lessons number four is Focus at the beginning on piling up a big nest egg Because remember you can it's relatively easy to catch up to compounding for the first half of the chart On the back half of the chart is hard to it's hard to catch up 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 Is another mistake that I see a lot of times people making in their wealth building portfolios Let's assume that You are 65 years old and 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 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 the challenge with growing older is often that you're advised to have your portfolio structured more conservatively and That is correct.

If that portfolio is funding a specific income need You have to have a portfolio's risk tolerance matched to the needs of income from it 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 Man, you it's hard 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 Conversation for another day point is we can't take much risk That's why you see these things these, you know, generic standardized ideas that as you get older make your portfolio more conservative What's the problem?

you're in those golden years at which you've got a massive portfolio and 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 It's what's the interest rate at which my portfolio was invested Let's give an example.

So now let's go you're at 65 years old So let me give you a 30 year investment time horizon a million dollar portfolio 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 Zero payments and what's that worth at the end of 30 years?

So zero payments because you're not contributing any more to it four point three million dollars at five percent interest 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 Growth but I want to keep it simple for podcast math here 30 years one million dollars at five What I use five percent five percent grows to four point three million dollars.

Now, let's say that you could in ten percent What's the difference there? with the event of 30 years You have 17 million four hundred and forty nine thousand dollars at ten percent Why? Because you're starting with a million bucks The 30 years still matters, but you're not starting with zero like you were in a younger age You got a million dollars and this is fundamentally one of the biggest mistakes that so many people are making with their portfolios is Automatically going it's quote-unquote safer more conservative giving up potential return With their portfolios now safety matters.

Don't don't hear don't mishear me safety matters You've got to match the income from a portfolio to the income cash flow requirements that you need in your life But if you have an extra million bucks and you don't need to automatically give up potential return 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 It's why the rich get richer all the time It's because you reach a certain point at which you can't possibly spend all the money 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 to spend Twelve percent I want to put this in here.

Let's say twelve percent on my example thirty years of investing thirty million dollars So you say why is it that you know all rich people don't just simply hire Put all their money in an index fund like Jack Bogle says maybe they should who knows all let them decide But if you can get from ten percent to twelve percent or let's just say fifty.

So let me 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 Years is seventeen point four million dollars twelve percent Invested over thirty years. It's thirty million dollars fifteen percent over thirty years Sixty-six million dollars so it starts to get a little bit laughable But the point is towards the back end of your investment career However long that is the rate of return matters far more than the amount of money you put aside So now if you take this to society and you compare this lesson What is the mistake that you see you see at a young age many people squandering all of their investment capital?

Using it up in consumption instead of an investment. And again, I'm guilty of this myself in so many ways We all have to decide how are we gonna apply these lessons? But just as a general rule, what do young people do at the beginning of their life? They consume They consume Whether it's you're a teenager and you can as I was a fool 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 Being a heavy drinker and going out every Friday and Saturday night and you know blowing 150 bucks on your weekly bar tab Whether you consume it on a fancy-looking car or whether you assume consume it on a fancy-looking house 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 They consume it That's the time at which it needs to be invested Now the other major mistake, let's say that you've accumulated some capital.

What do many people do with capital? well, they pull back on their potential rates of return and That destroys the potential of that capital and they walk away many people from millions of extra potential dollars Just recognize that None of these things can be applied in a vacuum of an individual situation But it's useful to have as a mental construct when you come and you look at your situation You say where am I and what can I do?

And that's the key is the app is how to apply it the key is Get compounding and get compound interest working on your side no matter how The cool thing is compounding and compound interest is already working on our sides. We're all enjoying the benefits of compounding We're all enjoying it already, let me give you an example This is why it frustrates me that we don't recognize it I'm just starting to read and I actually want I'd wanted to do this show before I read the books I knew that if I read the book I was my opinions were gonna be colored But I'm just starting to read Peter Thiel's new book.

Excuse me, Peter Diamandis Do you mean I don't know how you say his last name Diamondis is D. Amanda's his last name he's the guy who started the the X Prize not Peter Thiel, excuse me, and Peter D. Amanda's has this new book called 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 So I just was I got the book and I was flipping through it Just look real quick at a quick overview of what it's about and he has this really interesting chart that fascinates me And it's basically the application of Moore's law Moore's law, which is over a certain period of time the computing power of chips of the Microprocessor doubles and and the price halves.

I think it's 18 months. I forget what's what the specific specifics of it are But basically everything over time gets cheaper and with everything technology related gets cheaper and Better with a massive scale and this has been held consistent for decades now and it's fascinating but He puts in here a chart and evidently this is from his book abundance And he says that there are over nine hundred thousand dollars worth of applications that come free and included in every smartphone today And think about this the majority of you listening to me are listening on a smart device of some kind smartphone Think about all these applications Number one video conferencing and today's dollars it today's world.

It's free. It's free 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 in 1982 compression labs video conferencing had a MSRP of two hundred and fifty thousand dollars if you bring that forward into 2011 dollars, that'd be five hundred eighty six thousand dollars was how much it costs to do video conferencing in 1982 GPS today included in your phone free Nav star in 1982 sold it for a hundred nineteen thousand dollars adjusted for inflation is two hundred eighty thousand dollars digital voice recorder today free 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 digital watch free Seiko 1969 twelve hundred fifty dollars five megapixel camera today free 1986 Canon RC 701 three thousand dollars MSRP a medical library today free Example here was a I guess a library called consultant 1987 cost up to two thousand dollars video player today free 1981 Toshiba v8 thousand twelve hundred forty five dollars video camera today free RC a CC 0 1 0 1981 thousand dollars MSRP music player free Sony Sony CD player 1982 nine hundred dollars encyclopedia today free 1989 Compton CD encyclopedia seven hundred fifty dollars video game console free Atari 2600 to 2600 in 1977 cost $200 He total all that up and in inflation adjusted dollars and it's worth over nine hundred thousand dollars And those are just the applications that come standard in a phone Isn't that incredible Now you still obviously still have to buy the phone So it's not technically free you have to buy the device 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 I'm sure I'm gonna I mean This is a subject that fascinates me because I see it happening all through our society and changing anything That's touching being touched by digits is is is subject to Moore's law It's getting cheaper and better constantly cheaper better constantly cheaper better cheaper better cheaper better cheaper better cheaper better And it doesn't show any signs of slowing It's revolutionizing the world we live in Why did I go into that reason I went into that was because we're all already enjoying those benefits The fact that you're hearing me right now on a podcast this was not possible without great technological acumen five years ago today Free and easy every one of you knows how to go to the App Store Everyone I want to be knows how to tell someone go to the App Store and search radical personal finance And you can listen to my voice no matter where you are So enjoy the benefits of company that are happening in society and compounding happens in every area of life We focus primarily on money, and I think that's valuable But as I close I want you to think about applying this to other areas of your life after I prepared this This outline I went and pulled Book off my shelf by Darren Hardy called the compound effect, and this is one of the best simplest little books That was so helpful 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 penny He started with the magic penny, and then he went into this example here of how compounding happens in every area I'm gonna every area of life, and I'm gonna read to you 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 This happens in your job this happens in your knowledge happens your health There's so many areas of which we can experience compounding, but consider this and consider those examples I'm reading from page 11 highly recommend this book to you a lot of you I need to prepare a recommended reading reading list.

This is a great one It's just called the compound effect get it and read it, but page 11 here Three friends let's take three buddies who all grew up together They live in the same neighborhood with very similar sensibilities each makes around fifty thousand dollars a year They're all married and have average health and body weight plus a little bit of that dreaded marriage flab Friend number one let's call him Larry plods along doing as he's always done He's happy or so he thinks but complains occasionally that nothing ever changes Friend number two Scott starts making some small seemingly inconsequential positive changes 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 Scott wants to see changes in his life, but doesn't want to make a fuss over it He recently read an interview with dr.

Mehmet Oz and success magazine and chose one idea from the article to implement in this life He's going to cut 325 calories from his diet every day no big deal We're talking maybe a cup of cereal less trading that can of soda for a bottle of seltzer Switching from mayo to mustard on his sandwich Doable he's also started walking a couple thousand extra steps per day less than a mile No, grand acts of bravery or effort stuff anyone could do 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 Friend number three Brad makes a few poor choices He recently bought a new big-screen TV so he can watch more of his favorite programs 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 Oh And he installed a bar in his family room and added one alcoholic drink per week to his diet nothing crazy Brad just wants to have a little more fun at the end of five months no perceivable differences exist among Larry Scott or Brad Scott continues to read a little bit every night and listen to audios during his commute Brad is enjoying life and doing less Larry keeps doing as he has always as he always has Even though each man has his own pattern of behavior Five months isn't long enough to see any real decline or improvement in their situations In fact, if you charted the three men's weights, you'd see a rounding error of zero They'd look exactly equal at the end of ten months.

We still can't see noticeable changes in any of their lives It's not until we get to the end of the 18th month that the slightest differences are measurable in these three friends appearances But at about month 25, we start seeing really measurable Invisible differences at month 27. We see an expansive difference and by month 31 the change is startling Brad is now fat while Scott is trim by simply cutting 125 calories a day in 31 months Scott has lost 33 pounds The math here 31 months equals 940 days 940 days times 125 calories a day is a hundred and seventeen thousand five hundred 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 That's the math Brad ate only 125 calories more a day in that same time frame and gained 33.5 pounds now he weighs 67 pounds more than Scott, but the differences are more significant than weight Scott's invested almost 1,000 hours reading good books and listening to self-improvement audios by putting his newly gained knowledge into practice He's earned a promotion and a raise best of all his marriage is thriving Brad he's unhappy at work and his marriage is on the rocks and Larry Larry is pretty much exactly where he was two and a half years ago except now he's a little more bitter about it The phenomenal power of the compounding effect is that simple the difference between people who employ the compound effect for their benefit Compared to their peers who allow the same effect to work against them is almost inconceivable It looks miraculous like magic or quantum leaps After 31 months or 31 years the person who uses the positive nature of the compound effect appears to be an overnight success And reality his or her profound success was the result of small smart choices completed consistently over time The results in the above example seem dramatic.

I know but it goes even deeper than that the reality is that even one small change can have a significant impact that causes an unexpected and Unintended ripple effect. Let's put one of Brad's bad habits under the microscope 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 That impacts your entire life Brad makes some muffins from a recipe he learned from the food channel He's proud and his family loves it and it seems to add value all around 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 However, the extra food makes Brad sluggish at night He wakes up a little groggy which makes him cranky the crankiness and sleep deprivation begin to impact his work performance He's less productive and as a result gets discouraging feedback from his boss by the end of the day He feels dissatisfied with his job and his energy level is way down The commute home seems longer and more stressful than ever.

All of this makes him reach for more comfort food Stress has a way of doing that 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 She misses their time together and takes his withdrawal personally With fewer shared activities with his wife and an absence of fresh air and exercise Brad's not getting the endorphin release that had helped make him feel upbeat and enthusiastic 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 Flabby, he feels less self-confident less attractive and becomes less romantic Brad doesn't realize how his lack of energy and affection toward his wife affects her He just knows that he feels funky.

He starts losing himself in late-night TV because it's easy and distracting Feeling his distance Brad's wife starts to complain then becomes needy When that doesn't work, she emotionally withdraws to protect herself She's lonely. She pours her energy into her work and spends more time with her girlfriends to fulfill her need for companionship Men start flirting with her which makes her feel desirable again She would never cheat on Brad, but he has a feeling something's wrong Instead of seeing that his poor choices and behaviors are at the root of their problems.

He finds fault with his wife Believing that the other person is wrong rather than looking inside and doing the work necessary to clean up your messes Basic psychology 101 stuff and Brad's case. He doesn't know know to look inside They don't offer self-improvement or relationship advice on Top Chef or his favorite crime shows However, the thought may have occurred to him that if he had read The thought may have occurred to him that if he had read the personal development books his buddy Scott reads He might have learned about ways to change negative habits Unfortunately for Brad the small choices he made on a daily basis Created a ripple that wreaked havoc on every area of his life Of course all that calorie counting and intellectual stimulation has had the opposite effect with Scott who is now reaping the bounty of positive Results, it's that simple With enough time and consistency the outcomes become visible Better yet.

They're totally predictable The compound effect is predictable and measurable. That's great news Isn't it comforting to know that you only need to take a series of tiny steps? Consistently over time to radically improve your life 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 All that energy again at a later date for another try which will likely be unsuccessful I'm exhausted just thinking about it, but that's what people do We've been conditioned by society to believe in the effectiveness of a great display of massive effort.

It's downright all-american The most challenging aspect of the compound effect is that we have to keep working away for a while consistently and efficiently Before we can begin to see the payoff Our grandparents knew this though 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 In six months, I bet your grandparents worked six days a week from sunup to sundown Using the skills they learned in their youth and repeatedly throughout their entire life They knew the secret was hard work discipline and good habits It's interesting that wealth tends to skip a generation Overwhelming abundance often leads to a lackadaisical mentality which brings about a sedentary lifestyle Children of the wealthy are especially susceptible They weren't the ones who developed the discipline and character to create the wealth in the first place So it makes sense that they may not have the same sense of value for wealth or understand what's necessary to keep it We frequently see this entitlement mentality in children of royalty movie stars and corporate executives and to a lesser degree in children and adults everywhere As a nation our entire populace seems to have lost appreciation For the value of a strong work ethic We've had two if not three generations of Americans who have known great prosperity wealth and ease Our expectations of what it really takes to create lasting success Things like grit hard work and fortitude aren't alluring and thus have been mostly forgotten We've lost respect for the strife and struggle of our forefathers the massive effort they put forth and still discipline Chiseled their character and stoked the spirit to brave new frontiers The truth is complacency has impacted all great empires Including but not limited to the Egyptians Greeks Roman Spanish Portuguese French and English.

Why? Because nothing fails like success once dominant empires have failed for this very reason people get to a certain level of success and Get too comfortable Having experienced extended periods of prosperity health and wealth we become complacent We stopped doing what we did to get us there If we want to succeed we need to recover our grandparents work ethic It's time to restore our character if not for the sake of saving America at least for your own greater success and achievement Don't buy into the genie-in-a-lamp idea You can sit on your couch waiting to attract checks in your mailbox rub crystals together walk on fire Channel that two thousand year old guru or chant affirmations if you want to but much of that is hocus-pocus commercialism Manipulating you by appealing to your weaknesses real and lasting success requires work and Lots of it.

I have a quick real-time story to illustrate this nothing fails like success concept a great new restaurant Opened up close to my home on the beach in San Diego in the beginning The place was always immaculate the hostess had a big welcoming smile for everyone the service was impeccable The manager came over and assured it and the food was sensational Soon people started lining up to eat there and would often wait more than an hour to be seated Then unfortunately the restaurant staff began to take its success for granted The hostess became snooty the service staff disheveled and curt and the food quality hit or miss The place was out of business within 18 months They failed because of their success or rather because they stopped doing what made them successful to begin with Their success clouded their perspective and they slacked off Understanding the compound effect will rid you of 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 Your microwave eggs your instant hot water and text messaging enough, okay?

promise yourself that you're going to let go once and for all of your lottery winner expectations because Let's face it. You only hear stories about the one winner not the millions of you losers The person you see jumping up and down in front of the Vegas slot machine or at the Santa Anita horse track Doesn't reveal the hundreds of times that same person lost if we go back to our mathematical chance of a positive result Again, we have a rounding error of zero as in you have about zero chance of winning 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 Won, but I lost it would take almost nine years to get through the losers of a single drawing When you understand how the compound effect works you won't pine for quick fixes or silver bullets Don't try to fool yourself into believing that a mega successful athlete didn't live through regular Bone crushing drills and thousands of hours of practice He got up early to practice and kept practicing long after all others had stopped He faced the sheer agony and frustration of the failure loneliness hard work and Disappointment it took to become number one By the end of this book or even before I want you to know in your bones that your only path to success Is through a continuum of mundane?

unsexy Unexciting and sometimes difficult daily disciplines compounded over time Know too that the results the life and the lifestyle of your dreams can be yours When you put the compound effect to work for you It's probably a good sales pitch for the for the book right if you can't tell it's a good one Haven't read it in at least three or four years probably since it came out I bought it right when it came out and I just pulled it off the shelf this morning and said I want X I remembered his example and I wanted to find it It's a good it's a good book highly recommended that's the compound effect Now just knowing it isn't enough, you know, I've known that for a long time But you know for me When I apply I am applying the compound effect and radical personal finance and some of my business ventures in lots of things But is it just because I apply it in one area doesn't mean I'm applying in all the other areas for me My weakness is my own physical health, you know fat and flabby and weak I'm working on that.

I've got been getting some help and I'm working hard on that to apply it But I've realized even for me and I'm just sharing with you as one person who's learning alongside you I'm not an expert on these things. I'm an amateur and even for me just simply recognizing that Nothing comes in 30 days 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 So called success stories Because I can't control that Yeah, maybe somebody else can lose 80 pounds in 60 days and build 50 pounds of muscle But I'm not sure that I can control that maybe I can this goes back to This goes back to just the principles of investing you have to hold these things together.

They're seemingly disconnected, but they're together All I can control is do I work do I save do I put my money in and do I make wise choices? And am I making as wise of a choice as I possibly can I can't necessarily control this one Investment is gonna multiply a hundredfold.

It's possible 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 Maybe we do respond better and that's when you do get the overnight successes so-called But as he points out the athlete who walks into a 10 million dollar contract, they didn't walk in there There were years of hard work in their backstory years Learn the lessons of the magic penny apply them in your own life and get compounding working to you That's the core of what I wanted to cover in today's show.

I hope it's useful to you I hope you can take these concepts and build on them Remember we all don't feel bad if you're behind in something I hate that how oftentimes people look at these charts or hear about compound interest they throw up their hands The point is not to throw up your hands, but to start wherever you are You know going on my health example.

I've failed for years At health I've waffled all over the place. Does it do me any good? To sit back and focus on that doesn't do me a bit of good What does me good is to wake up and say I'm gonna start again, and I'm not gonna quit Same thing for you whether it's money health marriage career Anything in life Grows over time and as example with Larry and the other two guys Brad and whomever You can't see it the effects in the first place You know with the show I can't see the effects all I can do is show up and do my best But over time I get better people hear about it.

You start to get the compounding effect So what is it? Where are you applying the compounding effect in your life? That's the core So that's it. Thank you so much for listening if you have gotten benefit from this I would ask you to consider supporting the show on patreon as of right now We are up to 44 patrons and six hundred and three dollars per month 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 We swap out the intro music probably keep this for the outro Can't beat it right, but I'll swap out the intro music for a better intro We're on our way to six thousand dollars per month by June 1 That's the major goal if we can get six thousand dollars a month for the show by June 1.

I will avoid advertisers and corporate Sponsors and interests for the duration of the show if we can't get to sit there by June 1 I will need to go ahead and bring on some sponsors to make the show pay for itself A little bit better so that I can continue doing it Or at least doing it with the regularity and the frequency that I'm currently applying towards it But I really love to avoid that if every listener to the show gave two bucks a month We'd be done we'd be at six thousand a month.

So consider going to radical personal finance comm slash patron and Patronize the show. I thank you so much. Thank you so much for listening. We'll be back with you tomorrow Thank you for listening If you'd like to contact me personally, my email address is Joshua at radical personal finance comm You can also connect with the show on twitter at radical PF and at facebook.com slash radical personal finance This show is intended to provide entertainment education and financial enlightenment But your situation is unique and I cannot deliver any actionable advice without knowing anything about you please Develop a team of professional advisors who you find to be caring competent and trustworthy and Consult them because they are the ones who can understand your specific needs your specific goals and provide specific answers to your questions I've done my absolute best to be clear and accurate in today's show But I'm one person and I make mistakes if you spot a mistake in something I've said, please help me by coming to the show page and commenting so we can all learn together Until tomorrow.

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