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Money Math – The Simple Calculations Behind Financial Freedom
At MightyInvestor.com, our goal is to teach and model the thoughts and behavior that lead to prosperity, joy, and greater freedom. A big part of this process is Money Math. What’s money math? Quite simply the skills of using ninth grade algebra–both in your daily life and in investing. These math skills, combined with the ability to think long-term and delay gratification, result in financial independence. Let’s look at money math in more detail.
Money Math In Action
Here is a very simple example. Amazon.com randomly sent me an email the other day offering that if I bought an Amazon.com gift card for $100 they would put an extra $5 on the card.
I spent less than a minute thinking about it, then spent probably three minutes logging in and making the purchase.
Here’s why I bought the card:
- $100 sitting in my bank is currently making me about 1% return on my money.
- Getting $5 from Amazon represents an immediate 5% return on the same money.
- I will easily spend that $105 at Amazon in the coming months anyways.
- Thinking about this for one minute and putting it into action in three minutes took me four minutes total.
- Four minutes of effort for a $4 return (not $5 because I would have made $1 in interest if I’d just left the money in the savings account) represents a $60 per hour return on my time. (60 min. / 4 min. = 15. 15 X $4 = $60 per hour.)
- $60 per hour in savings equals about $75 per hour in earnings. This is because if you earn $75 per hour and pay 20% in taxes, you are left with only $60.
- At this point in time, $75 per hour in earnings is worth my time.
This is of course a borderline absurd example because we are talking about $4 in extra money. I didn’t actually do this math at the time I made the purchase. This is just an example to illustrate money math and the thought process behind it.
Money Math Is The Money Game
Here is another way to think about this. Let’s forget about what I would have earned by keeping the money in my savings account. In four minutes time, I earned $5. If I could continuously earn $5 every four minutes, I would have $657,000 after one year. Is that more than you make after taxes at your job? If so, this transaction was well worth your time. That’s using money math to play the money game and win!
This example highlights another key point. If, by buying the gift card, you spend more money at Amazon than you otherwise would have, all of the above math is pointless. So it takes self-discipline. You have to think about that gift card exactly like money in the bank or cash in your wallet. The truth is that most people will feel compelled to spend the money more quickly than they otherwise would have.
Retrain Your Thinking And Prosper
The money math thought process becomes automatic over time. But it does take practice to retrain your mental habits in the short term. Once your income goes up, this approach also helps you recognize how stupid it is to spend an hour trying to save a dollar unless you have very little in savings and a very low income.
So start using money math — and see what happens. Get Mighty!
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