Chapter 6: Unmask the Mystery of Money

Overview

The greatest force in the world? Compound interest.

Albert Einstein

A famous financial adviser spoke to a money management class about a great book, The Richest Man in Babylon by Paul Glason.

There is really only one message in this book, the financial guru said, and it s still true today ” to have no future financial worries, all you need to do is to save and invest 10 percent of your income for long- term growth.

The lecturer asked the group ” who had paid good money to learn how to straighten out their finances ” who d read the book. About two- thirds of the audience put up their hands.

Please keep your hands up for the moment, he said. Now, everyone who s followed the key message of the book ” saved and invested 10 percent of their income ” please leave their hands up, and the rest put your hands down.

Out of about 100 people with their hands up, every single one put them down. They d all understood and agreed with the message. It mattered to them. Yet none of them had taken the simple action necessary .

How come? To some extent, because action is always more difficult than thinking about action. But to a larger extent, because Paul Glason s book didn t provide an easy method for saving.

I ll make a deal with you. I ll provide an easy way out of money problems, provided that you promise to take it ” to act on the easy answer. If you re not prepared to take my proposed deal, skip this chapter, because you won t derive any benefit from reading it.

Three mysteries of money have baffled people from time immemorial:

• Why do a few people have most money and most people have very little?

• Is there a reliable way to make all the money you need?

• Can money buy happiness? If not, what s the point of it?

The good news is that money s mystery can be unmasked.

Vilfredo s Earth-Shattering Discovery

Over 100 years ago, a shaggy-haired Italian economist got a real shock . Professor Vilfredo Pareto of Lausanne University was investigating wealth in Britain. He found a curiously lopsided picture: a few people had most of the money.

Then he looked at statistics on British wealth in earlier centuries. Every time, he got an almost identical picture.

Pareto compared wealth in America, in Italy, in France, in Switzerland, and elsewhere. For every country with statistics, the same result. A law of money operated everywhere, any time.

Pareto explained his law badly . Not until 1950 did Joseph Juran rename it the 80/20 principle: 20 percent of people enjoyed 80 percent of money.

In Pareto s time, taxes were very low. In the last century, governments around the world taxed the rich to give to the poor.

Yet Pareto s picture hasn t budged. The wealthiest 20 percent of Americans own 84 percent of money. The planet s top 20 percent corner 85 percent of money. These numbers are shocking. Money ” and the 80/20 principle ” are more powerful than governments.