You Were Never Taught the Real Difference Between 5 & 6 - And it Shows!
Over the many years as I've taught financial planning seminars, I've asked this question...
What is the difference between 5&6? Most just smiled and looked at me like "Who do you think I am...
some dumb guy?" You think you know the difference between 5&6...
but do you? Knowing the difference can mean financial success or failure for you.
OK...
what IS the difference between 5&6? "One (1) of course", you say.
You're not alone; most everyone answers that way.
Here is where I start to teach my clients how to act in their own best interest, how to become a wise financial planner for themselves.
I teach them to first ask...
"5 & 6 what?" If you are just talking about numbers then you are correct in saying "1".
What about the difference between 5&6 percent (%)? Sure that's a 1% difference too...
or is it? If you're talking to your friend over the back fence, about the rate of return you are getting on your CD then the difference is 1 percentage point...
but it's also 20% more return (or money in your hand).
What? Let's look at it this way.
I'll hold up my hand, I have five (5) fingers up.
Now you hold up one (1) finger (be nice here).
We have six (6) fingers in total, correct? YES.
OK put your hand down.
I look at my five (5) fingers and count out each one by percentage.
Twenty...
Forty...
Sixty...
Eighty...
One Hundred.
Each finger is worth Twenty %, right? YES.
OK now, put your one (1) finger up again.
I have five (5) fingers held up and you have one (1) up for a total of 6 fingers.
The difference between you, with 1 finger and me, with 5 fingers is 1 finger (Rate of Return).
But can't we also say we have 20% more fingers (RETURN), than just me holding up my five? Sure.
Why does this matter? Here's where you get closer to Financial Freedom.
Let's say you have a chance to put your money in something (doesn't matter what) at say 5% with very little risk.
You also have a choice of something else at 6% with a little more risk.
Which do you pick? Normally, most people say...
"For only 1% more why take the risk?" But is that really the question you should be asking yourself? How about...
"For the extra risk, is it worth the 20% more money I'll earn?" Now it may NOT be worth the extra risk to get that extra money.
But maybe it is! Do you miss that extra 20% because you asked yourself the wrong question? Over the years this "little" 20% ads up big-time.
Would you like your 401 (k) or CD's to be 20% larger? Dumb question...
sorry.
It works in BOTH directions.
You have a choice of paying 5% or 6% on something and you say, "Ahh...
for only one percent more I can use the bank where my friend works.
" That better be your BEST friend because you are going to pay 20% more money (plus compounding) to do that.
Is it worth it? Maybe so...
maybe not.
But ask the right question when you are deciding.
Knowing the difference between 5&6 can mean the difference of Financial Freedom or Financial Disaster.
"If common sense is so common...
why is there so little of it?"
What is the difference between 5&6? Most just smiled and looked at me like "Who do you think I am...
some dumb guy?" You think you know the difference between 5&6...
but do you? Knowing the difference can mean financial success or failure for you.
OK...
what IS the difference between 5&6? "One (1) of course", you say.
You're not alone; most everyone answers that way.
Here is where I start to teach my clients how to act in their own best interest, how to become a wise financial planner for themselves.
I teach them to first ask...
"5 & 6 what?" If you are just talking about numbers then you are correct in saying "1".
What about the difference between 5&6 percent (%)? Sure that's a 1% difference too...
or is it? If you're talking to your friend over the back fence, about the rate of return you are getting on your CD then the difference is 1 percentage point...
but it's also 20% more return (or money in your hand).
What? Let's look at it this way.
I'll hold up my hand, I have five (5) fingers up.
Now you hold up one (1) finger (be nice here).
We have six (6) fingers in total, correct? YES.
OK put your hand down.
I look at my five (5) fingers and count out each one by percentage.
Twenty...
Forty...
Sixty...
Eighty...
One Hundred.
Each finger is worth Twenty %, right? YES.
OK now, put your one (1) finger up again.
I have five (5) fingers held up and you have one (1) up for a total of 6 fingers.
The difference between you, with 1 finger and me, with 5 fingers is 1 finger (Rate of Return).
But can't we also say we have 20% more fingers (RETURN), than just me holding up my five? Sure.
Why does this matter? Here's where you get closer to Financial Freedom.
Let's say you have a chance to put your money in something (doesn't matter what) at say 5% with very little risk.
You also have a choice of something else at 6% with a little more risk.
Which do you pick? Normally, most people say...
"For only 1% more why take the risk?" But is that really the question you should be asking yourself? How about...
"For the extra risk, is it worth the 20% more money I'll earn?" Now it may NOT be worth the extra risk to get that extra money.
But maybe it is! Do you miss that extra 20% because you asked yourself the wrong question? Over the years this "little" 20% ads up big-time.
Would you like your 401 (k) or CD's to be 20% larger? Dumb question...
sorry.
It works in BOTH directions.
You have a choice of paying 5% or 6% on something and you say, "Ahh...
for only one percent more I can use the bank where my friend works.
" That better be your BEST friend because you are going to pay 20% more money (plus compounding) to do that.
Is it worth it? Maybe so...
maybe not.
But ask the right question when you are deciding.
Knowing the difference between 5&6 can mean the difference of Financial Freedom or Financial Disaster.
"If common sense is so common...
why is there so little of it?"
Source...