Podcast Chronicles - A Story on Compound Interest
As I'm stepping up my own investment game, I heard a great story that I have to share! I know finance probably isn't your favorite topic, but you can't argue with free money.
I was listening to one of my favorite podcasts, "The School of Greatness", and the host, Lewis Howes, was interviewing Rory Vaden, the New York Times Best Selling Author of "Take the Stairs". He relayed this great story of three different kinds of people when he was asked,
“What do you think the primary difference is between rich people who acquire lots of money and everyone else?”
Well, Rory think of it this way, if you were to go into this coffee shop to order a coffee and you could hear the way that people were thinking about the decision, you’d likely hear at least 3 completely different ways of thinking…
The first group – let’s call them the lower middle class – would ask themselves 2 questions. The first question is ‘do I want this $5 coffee?’ And assuming the answer is yes the second question is ‘what do I have to do to get myself this coffee?’ They might steal it, buy it on credit, borrow money from a friend, or whatever. Completely governed by impulses they’d do anything to get the coffee.
The second group – let’s call them the middle class – would ask themselves 2 questions. The first question is ‘do I want this $5 coffee?’ And assuming the answer is yes the second question is ‘do I have $5?’ That seems like a perfectly reasonable line of thinking – and it is. In fact, that is how most people think; which is exactly what makes most people average or middle class.
The third group – let’s call them the upper class – would ask themselves 2 questions. The first question is ‘do I want this $5 coffee? However, assuming the answer is yes, their second question is much different than the first 2 groups.
Their next thought is ‘if I spend $5 on this coffee then that is $5 that I will not be spending on something else.’ That is $5 they won’t be investing into the stock market, or real estate, or a business, or into themselves. Specifically, they realize that is $5 they won’t be investing.
A wealthy person familiar with compounding interest knows that $5 invested today at an 8% interest rate for 30 years would be worth about $50. So their question is not:
‘What do I have to do to get this coffee?’
And their question is not:
‘Do I have $5?’
Instead, their question is:
‘Is this $5 coffee worth $50 to me, 30 years from now?!?!?!’
Now the tricky part is that they might still choose to get the coffee!! That is why you can’t look externally at one single financial decision someone makes and determine if they are programmed to be rich.
You can however likely determine if someone will one day be rich by following their thought process on how they make one financial decision!
IT'S SO TRUE!
I don't micro-analyze everything I spend money on (I think that'd make me go crazy), but there are definitely those times where I know I shouldn't buy.... It's about developing that next mindset, exercising self control, and looking into the future a little. That's where financial wealth is to be had! With my new friend, compound interest, it's all "free money".
Here's a link to the full podcast. You can skip to 27:30 for the part with the story shared by Rory.