Why Americans’ Lack of Financial Knowledge Keeps Them Broke

Transcript

We’re talking about why Americans are bad at saving money. We’ve noted that our retirement accounts are leaky. We try to keep up with the Joneses. The cost of many things we consume has gotten more expensive. We don’t practice deferred gratification. And here’s one that drives us nuts. If we could just tell every young person, if we could really get them on the same page with this, we think it would change their life. It’s that, as Americans, we don’t really understand exponential growth.

Yeah, this is something I just talked about in the previous section. We’re all about instant gratification. Give it to me now. I don’t want to think about something that’s good for me 10, 15, or 20 years in the future. If they could just hang out with us and watch the Money Guy show, let it sink in, and realize the benefits of deferred gratification, it would be a game-changer. The mind works in a linear fashion, but I want you to think about compounding exponential growth. You will be a changed person.

It’s really easy to think linearly. We might think, “Okay, if I have $500 that I invest at 20, it’ll be worth $1,000 by 30, $1,500 by 35, and $3,000 by the time I’m 40.” But that’s not how it actually works. The power lies in understanding exponential growth. Imagine this: at 20, I put my $500 to work. By 30, it’s grown to $1,300. By 40, it’s $3,600. By 50, almost $10,000. By 60, if I’ve compounded it at 10% annually, that $500 has grown to almost $27,000. Exponential growth is powerful, and we can have compounding interest working for us. It can become the eighth wonder of the world. Research shows that people who have learned about exponential growth are 70% more likely to focus on improving their retirement plans and other financial aspects.

To help you visualize this, we’ve created the Wealth Multiplier. We have two versions: one for young savers, taking you from zero to age 35, and the regular one, taking you from age 20 to age 65. By visiting moneyguy.com resources, you can see what every dollar that comes into your possession has the potential to become. It’s important to let your money grow upon itself. This changes how you save, invest, and spend. It makes you think differently about that $1,000 monthly car payment and what it could mean for your future.

Now, let’s talk about boiling point patience. It’s something we came up with to address another aspect of compounding interest. Initially, people get excited about becoming wealthy, but the challenge lies in maintaining the positive behavior over time. This behavior needs to be set and forgotten, not just for five or ten years, but for decades. It takes boiling point patience, just like water in a pot. Initially, it seems like nothing is happening, but once it reaches the boiling point, it starts bubbling up and working upon itself. The same goes for your money. Even if it doesn’t seem like anything is happening on the surface, have patience and let it work. Deferred gratification pays off in the long term.

To show you a real-world example, let’s consider someone who invests $500 per month. After 10 years, they will have invested $60,000, with $42,000 of growth. After 20 years, they will have invested $120,000, with $260,000 of growth. After 30 years, they’ve put in $180,000. They’ve had $950,000 of growth. And if you can do this for 40 years again, just saving $500 a month, after 40 years you’ll have put in $240,000. Yet, the growth, the compounding interest, the money that your money has made, is over $2.9 million. But you have to give it time to take hold. You have to have boiling point patience. Here’s what I think is interesting: in that first decade, you know, three-quarters of the money is yours. Whereas when you fast forward to 40 years in the future, now you’re not even 10% of the money. That’s right, it’s like 90-plus percent of the account value is actually the growth, meaning it’s not your contribution. Your contribution years ago is the foundation, but this thing has exponentially grown upon itself. I feel, I’m just sad. I need people to get beyond the present bias, actually let the money work. Let it be patient. Deferred gratification will pay in the long term.

But we get it, you guys are saying, “Okay guys, this is hypothetical. That’s an assumed 10% rate of return. That’s not how the market works. That’s not how investing works. We understand that seeing is believing. So we would encourage you, go do some research. Go look it up. Go look at historical rates of return. And let us help you. Let us show you how real-world this can be. If you would have taken $100,000 or you would have had $100,000 invested in the S&P 500, not in anything special, just the 500 largest companies in the United States, in 1990, if you would have invested that $100,000, by the time we got to 2023, by the time we worked through that 33-year period, that $100,000 will have turned into over $2.3 million. A real-world example. It’s an annualized rate of return of 10.2% per year. This is… I don’t know how to explain this from a person my age. I look back to my 18-year-old self, 22-year-old self, and when I first got this understanding of what personal finance is, compounding growth, and let my money work as hard as I do with my back, my hands, and my brain. I remember thinking, “Man, if only I had started, you know, I wish I was a little bit older so I could have been investing in the ’80s, because it sure does look like people who started investing in the ’80s made a fortune. That’s when all the money… Yeah, because I was in my… I’m in the mid-’90s when I graduated. I’m at the back end before we get to the dot-com bubble. And I remember thinking, “Man, this… This isn’t for me. I don’t know if I can do what happened in the ’80s and then happened earlier in the ’90s.” But here I am, 20-plus years in the future, and I’m now looking back and going, “Thank goodness I started where I started and put a few hundred dollars to work and then consistently paid myself every month.” Because now I look back and I go, “Holy cow! I’m at this point now when I do our Net Worth Tool every year when you go to learn.moneyguy.com, our Net Worth Tool. I’m in it.

It’s kind of a race to see how much more did my net worth go up, above and beyond what I made in taxable income. That means when you get to that point, it’s something we look for in our Net Worth Tool. You’re at financial independence. You don’t work because the man makes you work so you can pay bills. Now you work because of the joy. You own your time when this happens. And I just worry about, do people catch a clue that if they will just start the process, because this will be repeatable if we look at this 20 years in the future, 30 years in the future. The same people who might be starting at ground zero right now are going to be able to look back, just like I have 20 plus years in the future, and go, “Man, I’m glad I did it.” So don’t let this moment pass you by. There are so many people out there telling you the system is stacked against you, this won’t be repeatable. Somehow, though, when you look at the research and you see how long financial markets have continued to expand and grow, this opportunity will repeat for you too. You just have to start with small incremental decisions today.