February 2014 - Page 2 of 2 - Bankers Anonymous

February 12, 2014February 12, 2014

Book Review: Secrets of the Millionaire Mind

I’m making my way through a list of some of the most popular personal finance books,[1] and next up is The Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth, by T. Harv Eker.

Even though Eker offers some important insights, I can’t in good conscience recommend this.

First, the good parts

Eker digs in right away with the proposition that we are our own worst enemy when it comes to financial success. If saving money eludes us, or high-interest consumer debt burdens us, we probably need to do some soul-searching about our own relationship to money.

Did we learn from our parents that money was evil? Did some childhood experience make us likely to spend money beyond our means? Do we feel deep down that we do not deserve to be wealthy?

I’m not sure this applies in every case (some of us are just flat broke and its not psychologically-rooted) but I do think money brings out the irrational in everyone. Sometimes, money success requires us to overcome unconscious beliefs, or develop impulse-control via therapy, or to engage in Jedi-mind tricks to save money.

All of which is to say I think Eker has some important points to make about the relationship between our unconscious selves and our bank accounts.

Eker also has some interesting – totally unproven of course, but interesting[2] – things to say about how the attitudes of wealthy people differ from the attitudes of non-wealthy people. He’s not above platitudes and clichés, but as I recently wrote in another book review, many clichés turn out to be true and useful.

Finally, Eker employs a cheesy-but-probably-effective series of cognitive behavioral therapy methods to help people address their problem. He advocates matching a physical gesture to a stated intention. Something along the lines of touching your forehead and stating outloud: “I am the master of my financial destiny and I will maximize my wealth.”

Now, this is extremely easy to parody, and SNL did parody this type of thing, but if it works, then who’s laughing? I’ve got no problem with cheesy things that work.

And now, the bad parts

So that’s the good news, now for the bad news.

Eker is an insufferable jerk. In Chapter one, page one, we get to hear that he’s a multi-millionaire. Guess what he tells us on page two? He’s a multi-millionaire. Page five, yup, still a multi-millionaire. These are not the last times he mentions it either.

Also, did he mention that he offers live “Millionaire Mind Intensive Seminars” through his “Peak Potentials Training” company? Yes, yes he did.

In fact, he mentions it multiple times in every chapter.

On the inner flap, just above the small-print copyright and publishing information, Eker spells out the terms and conditions of a “Free” seminar available to purchasers of the book, a $2,500 value![3] And he mentions the “free seminar offer” on the back cover of the book. As much as Eker offers some useful platitudes, he loses me with the obvious up-sell.

Reading the book I can too easily picture Eker pacing a big ballroom, microphone in hand, spewing his carnival barker patter.

“I make millions of dollars through these 7 secrets to success, and you too can make millions of dollars if you learn these secrets. But in this $2,500 weekend class I can only tell you the first three secrets. So…

Once you sign up for my 1-week “Intermediate Class” for the low low price of $15,000 then I’ll reveal the next four secrets.

But of course that will only get you so far, so I highly recommend my further Expert class on the 10 Practices of Highly Compensated people, which will only cost you $1,500 per month.” You get the idea.

This book is really a long-form text-based infomercial for his in-person seminars.[4]

But hey, it’s a free country, I guess.

More than anything I see his patter about his multi-millionaire secrets to wealth as a kind of dog-whistling for credulous clients. If you’re the kind of person who can stomach his braggadocio and platitudes, you’re probably the perfect candidate to shell out healthy sums for his in-person, upsold, seminars.

Also, can I interest you in some time-shares?

Please see related post All Bankers Anonymous book reviews in one place.

secrets_of_the_millionaire_mind — Dog-whistling for credulous clients for in-person seminars

[1] Using this extremely flawed list, which pops to the top of the Google search for “Best Personal Finance Books of all Time.”

[2] Par for the course with this genre, but there’s no data in this book, only anecdotes. My wife would hate it.

[3] Or something.

[4] I gather from other reviews of the book online that this ‘free’ offer requires you to provide your email address and place a $100 deposit by credit card to reserve your spot. So, yeah.

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February 11, 2014April 4, 2014

Book Review: Why Smart People Make Big Money Mistakes

One of the challenges of trying to teach and write about finance is figuring out the right balance between factual/rational information and psychological/irrational awareness.

We can all “know” the right ten things to do with our money, or we can all learn five correct financial math techniques as much as the next person – but money topics are so darned psychological that the math and rules and facts only get us so far.

Without some kind of intervention, or a very unusual upbringing, we’ll probably just continue our irrational path and unhelpful decisions anyway.

Gary Belsky – a finance writer – and Thomas Gilovich – a psychology professor – teamed up to write the translational text Why Smart People Make Big Money Mistakes and How To Correct Them to teach us the most common psychological or irrational choices we all make about money, all the time. I say translational because this book is really a popularization, or translation, of behavioral economics, pioneered by Nobel Prize-winning Daniel Kahneman and the late Amos Tvorsky.

Quick aside on the history of economics: Traditional mainstream economics posits that people are rational, that we make self-interested utility-maximizing decisions, and we can understand society and the allocation of resources based on that beginning assumption.

Now, if this assumption of mainstream economics were actually true in all cases, the task of teaching personal finance would be made so much easier. We could just tell people:

1. Here are the facts

2. Here is your self-interest

3. Now go forth and become a rational, wealthy, person.

Since most people are not wealthy, I’m going to go ahead and make the bold statement that the assumption of rational self-interest needs some tweaking.[1] And Kahneman and Tvorsky pioneered some of the most impressive tweaking in 1960s, which pioneering work became known as behavioral economics. It turns out most of us inject quite a bit of irrationality into our personal finance decisions, which partly explains why so few people are wealthy, or as wealthy as they ought to be.

Belsky and Gilovich’s excellent book translates this research into memorable anecdotes and examples and applies it to some of the most common financial mistakes we all make. Their theory, which seems extremely plausible to me, is that understanding the irrational choices we often make, and why we make them, will help us make better choices in the future.

Ubiquity of Overconfidence

Most of us tend to overestimate what we know and underestimate our ignorance of what we don’t know. I appreciated Belsky and Gilovich’s following test:

Name a high and low range for

a) The diameter of the moon in miles and

b) The weight of an empty Boeing 747 in pounds. Set the range so that you are 90% confident that the correct answer will be within your high and low range.

This seemed pretty easy to me. And I recommend you think of your range before checking the answer in the footnote.[2] Just do it now, I’ll wait….

Ok.

So I did this and I got it wrong. Maybe you did too. Belsky and Gilovich say most people do get it wrong, even though most people could set an extraordinarily wide range and get it “right.” Their point is that for topics about which we’re really not experts, we tend to be overconfident with our answers. The idea here, applied to investing, is that we all tend to think we know more than we actually know.

In a related story, have you noticed a lot of complete amateurs who buy individual stocks? (Yes, I’m looking at you. And me.)

How about my own related story? Back in the Spring of 2001 I was selling bonds for Goldman Sachs and I was quite a sophistical investor, let me tell you. I bought and sold securities for a living, had minute-by-minute access to financial data, and smart finance professionals all around me with whom I constantly exchanged investment ideas.

I had my eye on an amazing stock for an amazingly profitable company and I had some pretty good information about it. I spent quite a bit of time on my Bloomberg terminal (all that Street research at my fingertips!) researching their strongest points. Although they ran a traditional oil and gas pipeline network business, they were known to employ some of the smartest guys on the planet, including an internal emerging markets bond hedge fund that was a client of mine. I knew these guys personally. After visiting my clients at this company in Houston, I came away so impressed that I vowed to myself I would invest my next big bonus in their stock.

Fortunately for me, Enron imploded in the Fall of 2001 before I got paid.

The lesson: I know nothing.[3]

And neither do you! This is good to remember.

My leading investment idea of 2001!

Anchoring Effect of Numbers

We are all extremely susceptible to the power of suggestion, when it comes to finance, through the ‘anchoring effect’ of numbers.

When the rug salesman shows us a fine carpet and names his offering price, we naturally know that it’s a bit high. We adjust some percent discount that seems like a ‘tough’ negotiating position, say 40% less. We then eventually find a middle ground with the salesman around 80% of the original offered price. We feel clever for driving that hard bargain to produce 20% savings. The rug salesman feels happy because, in fact, he started the price at 10 times above his bottom line price. What did we know?

When my student in the Personal Finance class I teach this semester mentions that Best Buy stocks are suddenly down 27% on the day, and asks me if he should buy some for a trade, as happened to me a few weeks ago, all I can think is I should tell him about:

1. The ubiquity of overconfidence, combined with

2. The anchoring effect of the previous days’ Best Buy price.

In reality, he has no idea whether Best Buy is fairly valued today, yesterday, or three weeks ago. Nor do I. But it seems cheap. So did the rug.

Money Illusion – Nominal v. Real

This one happens all the time. Belsky and Gilovich provide a nice example, which I’ve paraphrased below.

Three different homeowners experience price changes on their homes purchased for $200,000 in different ways, in the year before they sell it.

For the first homeowner, Peter, one year of intense inflation raises the price of all assets in his country, by 25%. He manages to sell his house at an appreciated price of 23%, netting him $246,000 at the end of the year.

For the second homeowner, Paul, at the end of a year of unchanged prices (no inflation) in the economy he sells his house for the same amount, and nets $200,000.

Mary, the third homeowner, experiences a rapid deflation of prices by 25% in the economy, and sells her house for a 23% loss, netting $154,000.

Who is better and worse off?

Now you may be clever enough to know that Mary is the best-off of the three, as the purchasing power of her $154,000 is higher than the purchasing power of Peter’s $246,000.

On the other hand, in the real world, it’s extremely challenging for all of us to remain immune to the illusions of real versus nominal dollar values.

Mental Accounting

As psychologically complicated beings, we create different ‘mental buckets’ for certain pockets of money.

This pushes us off the rational financial path in a variety of dramatic ways.

Most of us have a difficult time saving money because we experience the removal of that money from our ‘spending bucket’ as a painful loss.

When we can manage to set up an automatic payroll deduction into a savings account or 401K retirement plan, by contrast, we never have the chance to feel that loss. The act of accumulating savings goes from being extremely hard to do to being simple and unnoticed, a mental jedi-mind trick that for many is the key to having a savings plan.

Jedi_mind_trick_to_save_money — Jedi Mind tricks regarding Imperial Credits

Loss Aversion

Belsky and Gilovich point out that we tend to experience the pain of financial losses more dramatically than the pleasure of financial gains. This inequality of reaction leads us to be more ‘loss-averse’ in our investment choices than we should otherwise be, in a purely rational world. In other words, if we were not plagued by our loss aversion, many more of us would have a much greater portion of our investment portfolios in risky assets – such as stocks – rather than non-risky assets – such as bonds – as I’ve argued, from a purely rational standpoint, before.

It doesn’t make sense for your wallet or your rational self, but we act with our irrational instincts much of the time.

Belsky and Gilovich present a great deal more examples of ways in which we all fall prey to illogical, irrational, thoughts and actions when it comes to finance. I highly recommend their excellent translation of Nobel Prize-winning research into actionable steps for improving our personal financial situations.

Please see related post All Bankers Anonymous book reviews in one place

[1] No, nobody said anything about twerking. Now get your irrational mind out of the gutter.

[2] Moon diameter: 2,160 miles. I guessed a range of 4,000 to 40,000 miles. Oof. Empty Boeing 747 weight: 390,000 pounds. I guessed a range of 10 to 100 tons, or 20,000 to 200,000 pounds. Oof again. What did you guess?

[3] Or as Ygrette would say: “You know nothing, Jon Snow.”

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February 6, 2014February 10, 2014

Book Review: Peace and Plenty by Sarah Ban Breathnach

Peace and Plenty – Finding Your Path to Financial Serenity by Sarah Ban Breathnach is the worst personal finance book I’ve ever read.

I have written several personal-finance book reviews in the past year and have found quite a bit positive to say about most of the books, especially emphasizing their usefulness for a particular audience.

For those burdened with high-interest debt, for example, I recommend The Money Mentor.

For people with a significant net worth wondering whether they can find a low-cost, simple, and sophisticated style, I endorse Investing Demystified: How to Invest without Speculation and Sleepless Nights.

For a funny and sensible guide that’s stood the test of time, try The Only Investment Guide You’ll Ever Need.

For a Zen-like approach to growing wealthy slowly over a lifetime, I loved Simple Wealth, Inevitable Wealth.

Now it’s time to go in a different direction: The Hater’s Guide 2014 Prize for a Horrible Personal Finance book.[1]

So far in 2014, the far and away leading contender for this prestigious Hater’s Guide Prize is Sarah Ban Breathnach’s Peace and Plenty.

Oh My God this is terrible. Where to begin?

The narrative

If you haven’t heard of SBB[2] before, here’s the short version, as Prologue to my review of Peace and Plenty: SBB career rocketed upward from penniless, struggling author to fame and fortune as the best selling author of Simple Abundance in the mid-1990s.

Oprah Winfrey endorsed her Martha-Stewart-of-the-soul approach, combining meditative scrapbooking and deeply inhaling peppermint herbal tea as a way to cultivate everyday gratitude. As I learned to say in that gentle, smarmy, voice when I moved to the South – Bless her heart.

Fast forward to 2010. SBB writes in her Introduction to Peace and Plenty that not only is the money all gone, but so is the new British husband (ex-husband #3) – and the English country manor she adores more than anything else in the world. Since she shares her financial/spiritual crisis at the same time everyone else on the planet is suffering, surely this rags-to-riches-to-rags story will resonate with many?

Signs of trouble

Even in the opening pages of Peace and Plenty, however, we sense something deeply wrong with this book. And with this author.

Let me provide a few examples.

She has lately endured annoying collection calls from the celebrity limousine service to which she’s not paid her bills.

She is upset by the court case suing her for other unpaid bills, especially when she’s staying at a “lovely Long Beach hotel[3]” about to give a public talk to the “California Women’s Conference.” This organization, she is quick to point out, has featured her photograph on the conference program between Bono and Cherie Blair.

SBB cannot stop talking about her English country manor, at one time owned by Sir Isaac Newton. At the time of her writing she was about to lose her Sir Isaac Newton manor to foreclosure.

isaac_newton_fantasy — Sir Isaac Newton as fantasy character. SBB and he are close

She’s considering a fire sale on eBay of her extensive Manolo Blahnik footwear collection, but can’t yet bring herself to do it.

After the success of her Simple Abundance message she became a millionaire entrepreneur with – in her own words – “10 personal assistants on both sides of The Atlantic. A journalist at the time pointedly asked her “What’s simple about having 10 assistants?” She does not have an answer.

While I have not read Simple Abundance – the book that made SBB’s reputation – I have a sense from Amazon reviews that this book made a huge impact on millions of women. I endorse her central ideas – cultivating daily gratitude, enjoying simple pleasures, appreciating our blessings every day. Most of us need more of this. I practice Yoga for exactly this reason. This is a good thing.

In the first few pages we begin to wonder…who are you to teach us about “Simple Abundance?” She is the opposite of someone who appreciates “Simple Abundance” in her own life.

Celebrity limousines you can’t pay for, name-dropping your speaking engagements, $100K+ annual rent on a CPW apartment you don’t even live in, blaming your ex-husband for your self-inflicted financial wounds? Hello? Hello?

The problem with Peace and Plenty is that it exposes the author of Simple Abundance as a narcissistic fraud, an out-of-control materialistic shopaholic – a celebrity wannabe with a deep emptiness.

Her personal story

OK, so we notice a few warning signs in SBB’s life about personal finance habits. Is it fair to judge SBB by her personal story, rather than by the strength of her ideas?

Yes of course it is fair. Her personal story is all that SBB has to sell. We do not want to judge the book on her personal finance suggestions, because those are horrible.

Making terrible personal finance choices does not disqualify her from writing a valuable personal finance book – as past mistakes could make present reflections even more powerful. The entire foundation of Alcoholics Anonymous[4] is based on this, but it requires a “searching and fearless moral inventory – step 4 – early on.

SBB lacks any realistic reflection on her personal finance habits.

Two examples should help illustrate this absence of reflection.

After she divorces her second husband in 1997, SBB moved into a Central Park West apartment that costs more to rent per month than she paid annually to rent her previous apartment. She acknowledges the extravagance. And she acknowledges that, with her extensive travel schedule, she probably spent 6 weeks out of that year actually living there.

Ok, so what did she learn?

In the end she concludes that it was all worth it because – in the weeks following 9/11 – it meant a lot to her and her daughter that she had an apartment on Central Park West to feel better in. Okayyyyyy.

SBB has a little problem with real estate, as we learn later in the book. While living in the US, she found the Sir Isaac Newton country manor listing online and made arrangements to visit. She’s always admired Sir Isaac Newton. You should know he’s a kind of historic soul mate – they are close, people, trust her.[5] Without consulting anybody[6] – not her best friend, not her daughter – she made an offer to purchase the country manor on the spot.

Again, that personal finance mistake might lead to helpful reflections for the rest of us real-estate buyers out there. Nope. In Peace and Plenty she simply mourns for that soon-to-be-foreclosed-on country manor. Touching the stone wall of Sir Isaac Newton’s country manor that first time made her feel “home.” Okayyyyyy.

Her advice

This is easy to sum up.

When you experience some stress about your finances, the first thing to do[7] is start a scrapbook of financial ideas. Make sure that scrapbook has an attractive cover to add some flair. I’m not kidding.
Have a good cry, and then follow that up with her “Sweet Mercy Medicinal,” consisting of ½ cucumber, peeled and seeded; ¼ cup hot, prepared green tea; ¼ cup hot, prepared chamomile tea; all blended, refrigerated, and applied to the face to lessen the puffiness.[8] This is all real financial advice from SBB.
The next thing is you go and purchase her Peace and Plenty Journal of Well-Spent Moments for only $15.99 on Amazon now! And then record some well-spent moments in it. Also, I’m still not kidding.
Blame your 3^rd ex-husband for ‘taking all the money.’

At this point, you might be thinking I’m exaggerating. Surely I’m leaving out some of SBB’s practical budgeting ideas, or money saving ideas, or at least ideas about how to duck the bill collector?

Nope. You’re welcome to scrapbook some of your financial ideas (step one) but frankly, SBB finds that too much budgeting requires a reapplication of the Sweet Mercy Medicinal.

The writing

Do you like a lot of Capitalized Words about Breathy Moments to make you feel like you’re reading a Childhood Classic, such as Winnie the Pooh?

Do you enjoy the Absence of Narrative – or Absence of Organization in writing?

Are you a devotee of Quotable Women’s Journal Writing from the 1930s?

Was everything just Better in the 1930s when Women Brewed a Lot of Tea in their Kitchen and Didn’t Worry So MuCh AbOuT AlL ThiS CoMpliCaTEd MonEY TalK?

If you say yes to all of these, you’ll enjoy the Peace and Plenty writing quite a bit.

Ok, now you’re just being mean.

No, I’m not. There’s a serious point to be made here.

I actually read this whole book, searching for something, anything, that would explain how it came into print. Something, anything to explain how an author with these ideas could possibly write a personal finance book.

If Peace and Plenty is so bad, you might be wondering, why not just ignore it?

Why not let it remain obscure and unknown?

Thanks for asking. Here’s why.

She’s not unknown.

chopra_and_winfrey — These 2 really like SBB’s ideas.

Sarah Ban Breathnach is a best-selling author[9] who has been endorsed by Deepak Chopra,[10] has been named as one of Oprah Winfrey’s favorite things[11], and has been on Oprah’s show 9 times. She’s probably received more mainstream media exposure than any of the other authors I’ve ever reviewed. She’s clearly getting her message in front of more people than the authors who actually provide something useful. As a result, millions of people (in her case, 100% of them women) are at risk of taking her seriously when it comes to personal finance.

And the advice she gives and the personal example she lives by are horrible.

So that’s why I need to call attention to it.

Final Note

I already know her leading competitor for the 2014 Hater’s Guide Award, although I have yet to read the book.

The Millionaire Fast Lane by MJ DeMarco[12] appears to be the front-running competitor to Peace and Plenty, based on this awesome review on Amazon.

What I love anticipating is that The Millionaire Fast Lane bookends nicely with SBB’s book as laughably gendered garbage, only from the other extreme. Just as tea cozies and colorful finance scrapbooks are the central image of Peace and Plenty, a Lamborghini is the central image of The Millionaire Fast Lane. The insecure overcompensation of this DeMarco guy is just too delicious. I can’t wait!

Financial calamity attaches to both authors and to anyone who tries to follow their advice.

Please see related post All Bankers Anonymous Review in One Place

[1] I’d like to call this the First Annual Donald Trump Award for Terrible Financial Advice, but I suspect The Donald would actually welcome the additional free publicity and I really do not wish to support him. This footnote is all he gets from me.

[2] Sarah Ban Breathnach frequently refers to herself in the third person as SBB, so I’ve decided to do the same.

[3] I assume she means Shutters, but she mercifully does not say.

[4] And therefore, by extension, the global network of 12-step Bankers Anonymous programs.

[5] And did I mention she believes in reincarnation? Because SBB mentions it. Along with believing in divination. In fact, a divination expert she consulted about the Sir Isaac Newton country major found the house to be full of good spirits. So she had that going for her.

[6] Except the divination expert.

[7] Actually, even before scrapbooking, you should put a pot of tea on the stove. I swear to God as my witness she mentions this specific advice half a dozen times.

[8] Later SBB goes into detail about the financially therapeutic affect of arranging ones make-up counter. You can’t put a price on keeping up appearances. Lipsticks all in a row, priceless…You get the idea.

[9] Simple Abundance, following Oprah’s endorsement, reportedly sold 7 million copies.

[10] Chopra calls SBB “a one-woman’s movement…just the subversively cosmic voice society needs” to help America “re-evaluate our values…” And so that’s how you know Deepak Chopra is a fraud.

[11] Whatever that means. I give up.

[12] The Millionaire Fast Lane is listed as #8 on the “Top Ten Best Personal Finance Books Of All Time” according to this Inc. article. That article itself is the #1 link when you Google search for “Top Personal Finance Books.” Such rankings indicate, mostly, that the Internet is broken and that Evil wins, always.

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February 5, 2014February 5, 2014

Book Review: The Way To Wealth by Benjamin Franklin

My father once said to me “One of the interesting things about getting older is realizing that the clichés, prejudices, and popular wisdoms that we rejected as young, educated, independent thinkers turn out, in the end, to be true.”

I love this idea, in part, for its double-contrarianism.

The Way to Wealth by Benjamin Franklin reminds me of my father’s world-view, formed as a Depression-era child, delivered in Franklin’s 18^th Century style.

Also, these clichés are true.

We know “Early to bed, early to rise, makes a man healthy, wealthy, and wise,” and a few others, but I had not heard most of them.

The Way to Wealth originally formed the preface to Franklin’s Poor Richard’s Almanack. The book’s conceit is that Franklin’s alter-ego Richard overhears an old man (Father Abraham) quoting his favorite parts from the Almanack to a group gathered together before an auction. As such, the farmer gives a kind of fast-and-furious greatest hits of aphorisms, tied together by the themes of Industry, Care, Frugality, and Knowledge.

Some of my favorites from this book, which I hadn’t already heard:

On complaints about government taxes:

Friends, the taxes are, indeed, very heavy; and, if those laid on by the government were the only ones we had to pay, we might more easily discharge them; but we have many others, and much more grievous to some of us. We are taxed twice as much by our idleness, three times as much by our pride, and four times as much by our folly; and from these taxes the commissioners cannot ease or deliver us, by allowing an abatement.

On the urge to buy things that seem cheap, on sale, or a bargain:

Here you are all got together at this sale of fineries and knickknacks. You call them goods; but, if you do not take care, they will prove evils to some of you. You expect they will be sold cheap, and, perhaps, they may [be bought] for less than they cost; but, if you have no occasion for them, they must be dear to you…He means, that perhaps the cheapest is apparent only, and not real; or the bargain, by straightening thee in thy business, may do thee more harm than good. For in another place he says ‘Many have been ruined by buying good penny worths.’

On the relativistic nature of time, if you owe money at the end of the month:

When you have got your bargain, you may, perhaps, think a little of payment; but, as Poor Richard says, ‘Creditors have better memories than debtors; creditors are superstitious sect, great observers of set days and times.’ The day comes round before you are aware, and the demand is made before you are able to satisfy it; or, if you bear your debt in mind, the term which at first seemed so long, will, as it lessens, appear extremely short: Time will seem to have added wings to his heels as well as his shoulders. ‘Those have a short lent, who owe money to be paid at Easter.’

The little book’s scant thirty pages could, with smaller type and larger sheets, condense to about five pages. So you’re looking at about 10 minutes of dense wisdom from a founding father of the United States.

Please also see related post All Bankers Anonymous book reviews in one place.

Benjamin_Franklin_money — It’s all about the Benjamins

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February 3, 2014February 3, 2014

Video: Think Like A Bank

When I was a ‘debt buyer,’ acquaintances would occasionally ask ‘Oh, could you buy my debt?’

(and I would think, “uh, that’s not how it works.”)

That question told me two things:

1. Most people do not know that all banks and most investors are ‘debt buyers’ one way or another.

2. Most people don’t understand that the monthly interest they pay on credit cards, car loans, and mortgages all form someone else’s “yield” on an investment. Up until about 30 years ago that someone else would have been their bank, but in recent decades their interest yield typically goes to the investor in an asset-backed bond.

I passionately believe that understanding the math of compound interest will help you think like a bank or investor.

In either case, more people should understand – for personal finance reasons – the connection between the interest they pay and the growth of someone else’s money. Because if you reverse the order – if you yourself become the lender or investor of capital – then you get to earn the compound return available from someone else’s interest payments.

Understanding the compound interest formula – which shows the growth of money today into larger amounts of money in the future – helps provide the mathematical insight into this idea of debt interest = yield.

My short video on this subject: