Would you like to have a million dollars by the time that you retire? There are several ways to become wealthy. One wealth-building strategy is to marry a wealthy person (e.g., Bill Gates’ wife Melinda). Another is to inherit a lot of money or receive a large settlement of some kind. A third way is to invent or produce a product or service that is in high demand. In reality, though, most millionaires become wealthy the old fashioned way: they grow rich slowly over time through a combination of systematic investing and compound interest. It doesn’t happen overnight, however; rather, it often takes two to four decades.
Want to know more? Below are five questions about investing and compound interest:
1. Where should you put your money to earn the greatest return over time? A. Bonds B. Certificates of deposit (CDs) C. Stocks D. Mattress
The correct answer is C. Stocks (as measured by the Standard & Poor’s 500 stock market index) have had an average annual return since 1926 about double that of long-term government bonds and about triple that of U.S. Treasury bills, which are a proxy for cash assets.
2. To double your money in eight years requires what investment return? A. 8% B. 9% C. 10% D. 12%
The correct answer is B. To find out how long it will take to double a sum of money, use the “Rule of 72” and divide the time frame (e.g., 8 years) into 72. The result (9) is the interest rate (e.g., 9%) that it will take money to double a sum of money in 8 years.
3. For every decade that a person delays investing, the required investment needed to accumulate a certain amount of money (e.g., a million dollars) in the future A. doubles (2x). B. triples (3x). C. quadruples (4x). D. quintuples (5x).
The correct answer is B. You’ll need to triple the amount saved for each decade you delay. Research shows that millionaires start investing early in life and benefit from compound interest.
4. Investing a regular amount (e.g., $50) at a regular time interval (e.g., monthly) is called A. automated investing. B. 401(k) planning. C. debit accounting. D. dollar-cost averaging.
The correct answer is D. Research shows that many millionaires use this strategy. An example of dollar-cost averaging is contributing a certain percentage of your gross income each pay period to an employer 401(k) plan.
5. Research about millionaires indicates the following common key to success: A. they buy expensive houses and sell them at a profit. B. they spend less than they earn. C. they hold advanced degrees. D. they won a state lottery or other large contest prize.
The correct answer is B. Most millionaires live below their means and invest the difference. Looking for additional information about investing for your future and possibly becoming a millionaire? Some helpful reference books about accumulating wealth include:
Eight Steps to Seven Figures (2000) by Charles Carlson
Getting Rich in America (1999) by Dwight R. Lee and Richard B. McKenzie
The Automatic Millionaire (2006) by David Bach
The Elephant in the Room: Sharing the Secrets for Pursuing Real Financial Success (2007) by Ed Baker
The Millionaire Mind (2000) by Thomas J. Stanley
The Millionaire Next Door (1996) by Thomas J. Stanley and William D. Danko
The Wealthy Barber (1998) by David Chilton
