Math is Not Money – a Concrete Example

by Wes Bridel on December 24, 2008

in Stewardship

Stage 4 of 7: The Protection/Production Continuum Stage.

Much of what is taught by the financial media and most financial planners is false.  The reason is that the financial institutions spend billions educating all of those giving the education and that information usually sounds correct and intelligent.  No one ever stops to notice that the wealthy and these same institutions do exactly the opposite of what us commoners are taught to do.  The result is that we go through life believing many things to be absolute truth because we’ve heard them so many times, when in reality, it is simple to show and prove that they are not true in real life.

Money is not Math, and Math is not Money.  They work very differently and yet most financial wisdom given does not take this into account.

Let me give a concrete example:If you were to make an investment that doubled this year,  you’ll be really happy right?  What if the next year something happened in the economy or an event like 9/11 caused a fall in the market, and you lost 50% on that same investment?  Over this two year period, you would have earned an average of 25% on that investment, right?
100% – 50% = 50%.  50% / 2 = 25%.

A 25% return each year is very solid and real wealth can be built with returns like this, so you would feel good all around, wouldn’t you?

But what really happened?  If you invested $100, a 100% return would grow that money to $200.  In year two, that 50% negative return would shrink your $200 back down to $100.  The same amount you started with.  So in actuality, you achieved a zero percent real return, but it is true math to say that you averaged 25%/year.  And this kind of reporting is a common practice.

At Kingdom Calling, one of our greatest challenges is altering such financial misinformation perpetrated upon our clients before they come to us.  But its a necessary battle.

We’ll have many more concrete examples that expose this math/money bifurcation in the weeks to come – so tell someone you care about to tune in.

Merry Christmas!

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