Comment by mindcrime | Hacker News Reader

Comment by mindcrime | Hacker News Reader

Parent Full thread

But I believe what really separates the 1% from the 99% is financial knowledge more than anything else.

This is so true, and yet so many people overlook this point. I was fairly unaware of it myself for many years, but looking back on it, I now realize that when I graduated high-school, I knew essentially nothing about investing, stocks, bonds, even compound interest. I thought (like a lot of other poor people did and probably still do) that most of those things were "for rich people". That is, there's a perception that you have to already be rich (or at least, not poor) to benefit from Wall Street.

In hindsight, and given changes since my youth, that's totally not true. With services like Sharebuilder and/or low-fee online brokerages like e-trade or Schwab, almost anybody who isn't literally dead-broke can invest in the stock market and benefit from the mechanisms of capitalism.

Everybody keeps engaging in this false dichotomy between "Capital" and "Labor" when, in reality, most laborers do own at least limited amounts of capital, and they have the option to invest that and let it grow. But... how many of them know that that is possible, or know how to evaluate investments wisely, or understand why people say "put your money in index funds and leave it there", etc.

Assuming the average Joe Blow who graduates from the public school system receives approximately the same kind of financial education I did (which is to say "almost none") then the percentage of average Americans with that kind of financial knowledge is probably staggeringly low.

All of that said, this article makes an excellent point about how poor people are cut off, by law, from certain classes of investments. So basically, you're being penalized for being poor in the first place!

But it seems that most people would rather avoid substantive discussions about issues of this nature, and instead just run around talking about "Robber Barons" and how evil "the 1%" are, and promoting socialist-like policies.

Compound interest is a joke for the 99%. My savings account gives me 0.65% interest I think? http://xkcd.com/947/ However when you start having millions on 10% interest you start talking real money, at least from the perspective of the person who will never have that kind of investment.

That was just one example though. And it's a quirk of the current moment-in-time that interest rates have been hovering around historical lows for some time now. But I stand by my overall point that lack of financial knowledge and wherewithal is a significant factor that inhibits upward mobility.

And I'd say your right. I've always just laughed a bit at compound interest after how much I was told about it as a young man.

That's a little bit odd. Here in South Africa, you regularly get 'savings'-type accounts that yield 5+ percent interest, guaranteed by the bank. If it weren't for exchange controls, you'd probably have access to the sort of market (like South Africa) that would let you have that kind of interest rate.

Then again, we also have mortgage-loans that are at 10% interest.

That's likely because you have high inflation rates (7%?). It's possible the real interest rate is actually higher in the US

There's no free lunch, that high interest rate has to be considered against the currency risk from the weak and unstable ZAR. In the last 5 years a 5% interest rate will have compounded to a 27% one. In the same time the ZAR has weakened against the USD by 125%.

You will not find a combination of a stable currency and high guaranteed interest rates anywhere.

Compound interest is only a magical force on long term investing with decent interest (2% is fairly low for real investing). With a somewhat realistic 7% (usual growth of the S&P500) yield over 40 years, this is actually visible:

    >>> 1.07**40
    14.974457839206984

For comparison, linear interest would only be:

    >>> 1 + .07*40
    3.8000000000000003

In the comic, the magic fails to work:

    >>> 1.02**10
    1.2189944199947573
    >>> 1 + .02*10
    1.2

Finally, do note that compound interest is a step up from linear interest, which itself would already be better than "no savings".

That's why in low interest regimes you invest in shares and reinvest the dividends.

Look at the other side, and it's far from a joke.

Avoiding paying 10% or 20% (or higher) interest is equally (perhaps more) important to a decent financial outcome.

Reply on news.ycombinator.com