If you could have one tip that would change your child's financial life forever would you take it?
Of course, it's not that easy because first you need to make a choice...
The decision you need to make is which of the following two options would you take:
- a) One cent that doubles every day for 30 days, or
- b) $1,000,000 cold hard cash
It's probably pretty easy to work out that most people would choose to take the $1 million upfront because it seems like more money – but they'd be very wrong.
The one cent coin that doubles every day for 30 days is worth vastly more because of the magical power of compounding, but more on that later.
And the fact that most people don't understand that calculation has everything to do with our school system.
The problem with education
I've said many times that the principle of compounding is central to growing wealth over the long-term.
The problem is that it's not taught in schools so most people don't understand it and go on to struggle financially later in life.
If you ask me, too much of our schools' curriculums are dedicated to abstract topics that are infinitely less useful than compounding and the notion of opportunity cost.
The latter term, defined simply, is what one would give up by choosing an alternative option.
The main issue is that students often don't get exposed to these principles until they go to university, where they have to actually study business or finance to learn about them.
Instead of teaching so many theoretical subjects, education should be about applying knowledge toward achieving a specific objective such as financial independence.
So, to prove this, what if we asked every child to try and save $100,000?
Sure, it sounds crazy, but I think we might also agree that it is possible.
Our children should always have bold, audacious goals, especially as far too many adults haven't saved anything close to $100,000 during their entire lifetimes.
So, why don't we get our kids started early, because anything they end up saving is still better than nothing, right?
Let me be clear: it won't be easy for them to save $100,000.
But the point is that the earlier they start saving, the more attainable the $100,000 goal will become thanks to the power of compounding.
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Whether or not Einstein actually said that "compound interest is the eighth wonder of the world," there's still an extremely valuable insight from that statement.
He reportedly went on to say that those who understand compounding are destined to collect interest over the course of their lives but those who don't understand it will end up paying it.
Encouraging young people to try and save $100,000 is a worthy goal regardless of the outcome.
So why not take up my challenge and encourage a young person (or two) to try and save $100,000?
You can assist by helping them to set up a plan to achieve such an audacious goal.
The very act of trying will change the way they think about everything relating to personal finances.
In order to hit the target, they'll need to ask difficult questions such as: Do I want to spend my money on fast food and the latest gadgets, and how can I invest my savings to make it grow more quickly?
And just in case you were wondering how much one cent doubled every day for 30 says ends up being...
Well, it's more than $10 million, which is 10 times the $1 million that most people would've have taken to achieve a supposedly "easy" win.
Of course, you probably would've known that if it was taught in school.
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