Learning what is true and what is not true can be complicated. The difference between what is happening and what is not happening can also be alarming. As an example, let’s say someone invested $1,000 onetime and received an average 20% return for two years. How much would that person have at the end of two years? (simple compounded interest) $1,400 $1,280 $800 $0

Many people with calculators will answer that the person would have $1,440. That is correct. A 20% rate of return compounded annually for two years is $1,440. So, what this person heard from his planner or read in a prospectus, newspaper or magazine article about the 20% average rate of return may cause someone to assume that he has accumulated $1,440. That was pretty simple, right?

Do understand that math is science. Two plus two is four. Two plus two can’t be three, five, six or any other number other than four. But let’s take a look at answer B, $1,280. If someone invested $1,000, and in the first year, he received a 60% rate of return, and in the second year, he lost 20%, he would have still averaged 20% for two years, but in the end, he would only have $1,280. So answer A and B are both right.

Now, I am starting to think, if A and B are correct, I better look at answer C, too. If someone invested $1,000 and in the first year received a 100% rate of return but lost 60% in the second year, he still averaged 20% a year, but the result is dramatically different. He would only have $800. Wow, how can a simple question have so many answers?

Now I hate to do this, but let’s look at answer D, $0. If the investment of $1,000 received a 140% rate of return in the first year and then lost 100% the second year (100% loss means you lost everything), you would still have an average of 20% for two years but have not money left. Holy cow, understanding what is true and what is not true, suddenly, got really complicated.

No wonder people are confused. It wouldn’t surprise me that some companies would try to confuse you on purpose. Their marketing could proudly advertise that their investors have received an average 20% rate of return over the last two years. Sounds good, right? Everyone must learn to pay attention to what is going on. It is critical.

The process of learning and discovering what is true and what is not true in your everyday life can create dramatic changes in your financial future. Understanding how your money works for you, not others, is the center point in changing the way you think. From now on, the way you think will impact your future. It is now time to think about the money in your life from a different perspective.

 This educational material is provided by the Wealth & Wisdom Institute and Common Sense Economics, LLC.