Try this question out on your friends – or your children.
If you were to choose to get either $1,000 a day for 30 days or a penny on the first day and then double your money every day for 30 days, which would you choose?
Most people will begin to silently add up the numbers. They get to about day 10 or so, when the amounts would be $10,000 and $5.12 respectively, and then opt for the first offer, totaling $30,000.
A few people figure it’s a trick question and reflexively choose the second option.
Very occasionally will someone double the pennies on paper. When you do, you realize that in 30 days you will have amassed $5,368,709.12!
Why do people quit playing this game before finding out where it might go? Is it because we prefer instant gratification instead of what money can do over time?
Related: Delayed Gratification
We don’t respect the small amounts of money enough to believe that they can grow into a fortune.
Do you fritter you money away heedlessly? Do you go for the bargain at the mall instead of socking away an extra $50 in a savings program?
Do you automatically say no to spending, thereby valuing money itself more than what it can do for you?
When you let emotions and reflexes govern your behavior with money, you almost always fail to act in your own best financial interest.
You don’t have to be a financial genius to make your money grow. Time devoted to considering you financial decisions is essential.
Do you stash your money where it’s most convenient or follow the first piece of advice you hear? Don’t act too hastily or wait too long.
Related: Paying The Price For Financial Procrastination
What is your risk tolerance? Really?
Susan has inherited $10,000 that she wants to use towards a down payment on a house. Where should she invest it until it’s needed?
A reliable vehicle for keeping short-term money safe is recommended. But she is doubtful. “I want to get a good return and a high interest savings account only pays 2%,” she says.
Financial advisors will ask investors to choose between two options. Here’s an example:
- An 80% return on their money the first year but a 40% loss the second year, or
- A 5% return the first year and another 5% return the second year.
Almost without fail people will choose the first option, figuring that if they earn 80% the first year and lose only 40% the second they still would have a 40% gain. Right?
Wrong. An 80% gain on $10,000 is $8,000 for a total of $18,000 after the first year. The next year, the loss is 40% of $18,000 or $7,200 for a total of $10,800.
Now look at the return on the other choice. 5% of $10,000 is $500 for a total of $10,500 after one year. 5% of $10,500 (we’re compounding here) is $525 in the second year, for a grand total of $11,025.
Distinguish between short- and long-term goals
People see the above illustration of the idea that if you just plod steadily along you will come out ahead. But that’s not always true. If you have a long period of time before you need your money (more than 5 years), you are better off investing in the stock market.
When you have a limited amount of time (one to three years) you don’t want to take the risk that any of your money will be lost.
Related: The Best Time To Start Saving Is Now
Research shows that stock investors have a 28% chance of losing money during any one given year, but over 10 years that risk falls to only 3%, while the average gain totals more than 10%.
Conclusion
As I mentioned above, you don’t need to be a genius to make your money grow. Make a timely decision instead of dithering away because you don’t know what to do or want to time the market. Be honest with yourself about how much risk you are comfortable with.
Related: Financial Literacy Is A Lifelong Pursuit
Don’t risk short-term money because you deem the returns too low. But don’t shortchange your future by not giving your money the time it needs to do all it can for you.
