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The Importance of Understanding Compounding

By Nova

Sam is joined by Dr. Howard, clinical psychologist, researcher, writer, and professor at the University of Oxford. Howard discusses the importance of understanding compounding, the true reason why rich people are happier than poor people, and how the human brain works which drives our decision-making as consumers.

Earn more through the compound effect

Not spending money but saving it in different ways can lead to a significant difference in health 10 years down the road. If you saved a pound or a dollar a day, put it in a fund that gave you 5% a year you would earn more than putting it in a bank for example with a lower rate. For most people, it’s certainly not top of mind when they’re making decisions about money. We live in the present, and so one of the big biases relevant to money is something called temporal discounting, which is the tendency to discount the future because it’s in the future.

Where and how to spend your money is not something that has been taught in schools.

Earning a lot may still not be enough

Society has led us to believe that we need to accumulate more and more things to be successful and happy, but when you look closely at those who are successful, they accumulate less, not more when it comes to material things they don’t use.

More than 40% of professional football players who earn millions are broke. And they’re the biggest, highest earners. Why? Because they don’t know how to manage their money. Money management is a skill that no matter what income you should master.

Another reason why earning a lot may still not be enough is because what people want isn’t money but happiness. A study from a group of Harvard students looked at people who had a million dollars and compared them to a group who had 10 million or more dollars. What they found was people who had $10 million more did seem to be happier. But the reason why might be different than you think. They felt good by giving money away to causes and charities and things that were important to them. So it wasn’t the money per se. It was what allowed them to do that, made them fulfilled or filled a purpose.

Earning a lot and retiring early isn’t as exciting as you may think

Dr. Howard has seen very successful corporate executives who retired and they come to see him to tell them that they’re feeling depressed because they don’t feel like they were how they used to be. They thought playing golf every day would be great which definitely is once in a while, but not every day. Dr Howard doesn’t believe in retirement. He believes in retirement that you find other ways of manifesting yourself, of helping others.

To check out more on the topic of being rich and happy, check out Dr Howard’s podcast here!

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Nova Money (former Cash Coach)