Three Answers

understanding compound interestThe Wall Street Journal published a blog a few weeks backa three question test of financial literacy (which of course unleashed fury in the comments on financial literacy – or lack thereof – in North America.)  But what I did notice was that while the answers to the three multiple questions were provided at the end of the post, no one took the time to explain why the answers are the answers. Which I think is not so great because if you didn’t get all or any of answers right, you might feel not-very-smart and that’s not allowed here on The Money Coach.

No stupid questions, just an industry that is most profitable when financial literacy is at a minimum. 

So let’s do this!  The first question was: 

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow?

A. More than $102
B. Exactly $102
C. Less than $102

The answer to this lies in understanding the concept of compound interest.  You can click that for the Wikipedia definition, but here is mine:

If you have $100 and you put it in a savings account that pays 2% per year, at the end of the first year you will have $102.  (100 x 2% or 100 x 1.02 = 102).  So that is after one year.  The questions asks how much you will haver after 5 years.  

Working this out from day one: 

Year one: 102 x 1.02 = $102
Year two: 102 x 1.02 = $104.04
Year three: 104.04 x 1.02 = 106.12
Year four: 106.12 x 1.02 = 108.24
Year five: 108.24 x 1.02 = 110.40

After five years, you would have $110.40 which is more than $102, therefore the answer is A.

If you break this down, the magic of compound interest is that not only does your original amount (in this case, $100) earn interest, each and every year,  but so does your year-on-year interest.  So in the second year, your $2.00 of interest (from the first year) is also earning 2% interest. And then in year three, your $4.04 is earning 2% interest, and the $$ and the years go by.

A common (and understandable) mistake is to take the 2% per year and multiply by it by 5 (the five years in the question) which is 10%, and so $100 x 10% is $110.  This however, is not correct because when your interest is paid annually (once every year), your interest payment then becomes part of your original amount (so at the end of year one, $100 because $102) and then also earns interest for each and every year thereafter.  

The concept of future value/compound interest/time value of money is one of the top three of this blog.  It is so important to understand, both in how earn money, but also in how you owe money (i.e. debt – mortgages, car loans, etc. work in the same way, against you – being, you have to pay interest on your interest.  More on this in the coming weeks.) 

 I will answer Questions two and three from the WSJ blog in the next few days. 

My Experience With The CoWorking Movement–Meh

co-working experience

…and no, neither Vince Vaughn or Dave Franco were in my co-working space but I wanted to use this image because I thought the marketing campaign behind it was super creative.

The first time I pivoted out of full-time work in 2008, I had plans to start this blog. I was excited about working from home. I kept the kids in 7-hour a day daycare and had the best intentions in launching an online business. 

Weeks went by, and then months. I did a lot of everything, which means I focused on (and accomplished) nothing.  

Three years later, empty-handed, I went back to work.  

So the next and last time I moved out of office work in August of 2014, I was determined not to make the same mistakes. The answer, I was sure, lied in the CoWorking movement.  A quick Google search revealed that not only was there a kick-ass space only 10 blocks from my home, but it was located in a super cool part of town surrounded by coffee shops, vegan restaurants and train-tracks (how urban chic!).  The ceilings were high, the desks were oak, and the paint on the wall was red.  It was gorgeous.  

CoWorking offers a solution to the problem of isolation that many freelancers experience while working at home, while at the same time letting them escape the distractions of home.

 And I moved out four months later. 

What happened? First, I have to take much of the responsibility for it not working out.  That said, nobody spoke.  There were, what appeared to be, fabulously creative people, working on fabulously large 30 inch MAC screens – but it was almost impossible to make eye-contact let alone have a meaningful conversation.  And when my phone rang super loud, or I launched a podcast (always, with an exceptionally obnoxious intro) forgetting to plug my headphones in, the shock and irritation was palpable.  Think library.  I tried the “when in Rome” method by wearing my headphones, but there are only so many podcasts, music, audio books that you can listen to 7 hours a day before you start to go a bit loony and your ears actually start to hurt.  (Even white noise – listen to a train combined with coffee shop from Noisli for 5 hours and see how long it takes you to come back to reality. ) 

 In short, I was lonely.  Which does not happen when I am working at home because I get to have long conversations, out loud with my best friend  ( warning:  do not try this in a corporate environment, it is harder than you might think to convince the CEO it is a sign of intelligence.) 

…strong communities can sometimes be difficult to penetrate, precisely because they are forged on close ties and deep connections between the people in it. Communities are defined by the participants’ feeling of belonging – and if you don’t feel like you belong it is difficult to feel like you are part of the community. –How does it feel to start CoWorking?

And while it wasn’t for me, I am glad I did it. Because otherwise I would still believe that there is this utopia for Entrepreneurs just ten blocks away. And that by not being there I was missing out on the exact collaboration and support I needed to build my business. 

So who is CoWorking for? 

It could probably work for anyone that was willing to put the time and effort in to make it work.  It for sure works for introverts or those who  just want to get sh*t done because (in my experience) the norm is to put your oversized headphones on and tune out the rest of the world.  For extroverts, and/or those using CoWorking as a solution for social interaction, motivation or accountability, try any of these: 

  • Give Send an email to the CoWorking Group that there are fresh-baked vegan chocolate brownies in the kitchen, supplement with short-story or joke (in regards to the brownies, but not anti-vegan!) to show you are approachable and not socially inept. 
  • Ask. Message the group that you are interested in learning more about the group and hey, everyone has to eat – would anyone like to have coffee with you at 10:30 in the cafe downstairs?   There is most often a co-ordinator for the group.  If you are not sure who it is, it is the person who gives you the password for the WiFi.  Because this person has met with everyone at least once, ask him or her if there is anyone in the same boat as you–looking for more than just a desk and a chair–and ask for an introduction. And then? Ask them about themselves and their business.  Be interested, provide feedback.  Give first.
  • Volunteer.  Volunteer to welcome any newcomers to the group by holding a weekly coffee and croissants (vegans eat croissants, right?) in a cafe for further Q&A on your CoWorking neighborhood (best restaurants, yoga, dry-cleaning). Invite any members of the current group to join.  
  • Attend.  At the CoWorking space I tried, there were many pot-lucks, skating nights, drinks after work, evening workshops.  It escapes me now, but there were several good reasons why I could not make these events, but I highly suspect that if I had, I might still be working there.  Well, maybe not.  I really do need bursts of creative destruction (i.e. acceptable noise) in my work-day.  But in declining the majority of invites, I most likely missed out on both business opportunities, entrepreneurial advice from those who had gone before me and (grab a kleenex) friends. 

Still not sure?  Most Co-Working situations offer a trial, or a 3 days a month (for when you absolutely need to get out of the house, or meet a client in one of their meeting rooms).  Start here.  And good luck!  

Important note:  No vegans were harmed in the publishing of this blog post!