"Say you have a CD that pays you 6% interest. When you divide 6 into 72, you get 12. This means your CD will take twelve years to double".
"In this case, since the Indians were getting 7.2% interest, we would divide 7.2 into 72, which gives us 10. This means every ten years, the money would double. And over 370 plus years, the money would have doubled more than thirty-seven times. Are you with me?"
"I think so." Ronnie slowly nodded her head.
"So when you double your money this many times, $24 will turn into three trillion dollars."
"No way!" Ronnie said incredulously.
"Want to try it on the calculator?"
"Not now, but I will as soon as I can remove myself from this chair and look for one. So tell me, how many times would I have to double the $10,000 I have in my IRA account to turn it into a million dollars?" Ronnie was thinking this might just be her ticket into the millionaire club.
"Let's say you are getting the same 7.2% rate of return, so you will double your money every ten years.
"So 1, 2, 3, 4, 5, 6, 7. You will need to double your $10,000 seven times and the million dollars is yours. Do you think you can wait seventy years and not touch the money?"
"Oh. I think I may take it out a few years before I hit the grave. But, according to your calculation, even if I take it out when I retire in thirty years, my $10,000 will still give me close to $100,000, right?"
"Not bad for doing nothing, don't you think?"
"This sounds almost too good to be true." Ronnie could almost see her $10,000 turned into $100,000.
"Ronnie, creating wealth is not rocket science. Like making your beef stew here, you just have to give it time and pennies will grow into dollars. Let me help bring the point home for you by telling you this story about the proverbial good and bad twins. And I use the words good and bad just to differentiate them and not to say one is necessarily better than the other.
"The way the story goes is, you have the good twin who started putting aside $2,000 a year at age eighteen and continued to do so every year for the next ten years until he turned twenty-eight. Assuming he's getting the same 7.2% return on his money, he won't have to save another penny and still will have more than one million dollars when he retires at sixty-five. Ronnie, tell me what's $2,000 every year for ten years?""$20,000?" Ronnie had no problem doing the calculation.
"Not bad! Now, we have the bad twin cruising through life and spending every penny he makes. At age thirty-nine, he was practically broke when he heard of his twin brother's plan to retire early. That's when he realized how uncertain his financial situation was".
"So he went to a financial planner and asked for a plan that could give him as much money as his brother when they both turned sixty-five. The bombshell that the planner dropped on him was that if he were to get the same 7.2% return as his twin, he would have to save $10,000 each year for the next twenty-six years. Ronnie, how much is $10,000 each year for twenty-six years?"
"So, to get the same million dollars, the good twin only had to put in $20,000 because he started early. The bad twin had to put in $260,000 because he started late. Get the point, Ronnie?"
"Poor guy!" Ronnie found herself feeling sorry for the bad twin. "Nothing works better than a bit of sibling rivalry. I hated it when Gary came home bragging to Mom about his all A's report card and I had to explain to her why I couldn't pass my geometry class. That makes me a sucker for underdog."
Copyright 2001 by Meena Cheng. No part of this book may be reproduced without written permission from the author: email@example.com
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