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Money Tips from Alice in Wonderland

Money Tips from Alice in Wonderland

Robin Applegarth | Divine Caroline

July 03, 2010

Does the world of investing seem like a mysterious place? You may feel like you’ve dropped down a rabbit hole into a strange land of creatures with names like TIGR, GNMA, and LURMS.

Lewis Carroll, the author of Alice’s Adventures in Wonderland, and Through the Looking Glass, was a mathematician and logician of the 1800s. His inventive tales are full of financial metaphors. Let’s tour Wonderland and see what its odd creatures can tell us.

At the beginning of the story, a white rabbit dashes in front of Alice. He’s carrying a watch and declaring “Oh my ears and whiskers, how late it’s getting.” Time and lateness is a theme that twists and bends through this fairy tale.

1. Keep time on your side. If you’re over age thirty and haven’t started saving for your future, you’re late too. The time value of money makes it much more efficient to save early.

Today’s Alice (we’ll call her Allison), will find that time can be a magic fairy dust for investors. How is this? If Allison starts saving $200 a month at age twenty-five, earns 8 percent a year compounded, and saves for thirty years (until she’s fifty-five), she’ll have $612,103 by the time she reaches age sixty-five. If she gets distracted by following muttering rabbits and doesn’t start until age thirty-five, she’ll only have $283,522, or $328,581 less.

No, this is not a hazy dream from a hookah-smoking caterpillar. She would have contributed exactly the same amount, but because she started 10 years later, the earnings had less time to grow. This ability of money to mushroom over time is called “compounding.”

Whatever your age, if you can give savings 20-plus years to grow, you’ll be a richer rabbit.

2. Ignore the jabberwocky, and invest in things you understand. Alice met many strange creatures on her journey—Tweedledee and Tweedledum, talking cards, and the Mad Hatter. Most of them spoke nonsense, warnings, or in riddles.

Our modern Allison lived through the economic downturn of 2008–09. It too was marked by warnings and confusion. Bankers touted complex mortgages. Wall Street sold entangled derivatives, and used financial language that sounded like jabberwocky. Where was the money? Your guess was as good as the dodo bird’s.

Be sure you understand where you’re putting your savings. Ask questions, and learn something new. That way you’ll know that TIGRs don’t bite—they’re Treasury Investment Growth Receipts. GNMAs are tame Government National Mortgage Association bonds, and LURMS … well, they’re imaginary.

3. If you don’t know where you’re going, get directions. In the story, Alice eventually wandered into the deep woods. Here, at a fork in the road, she saw the elusive Cheshire cat, and asked him which way to go. He responded by asking her where she was headed. When she couldn’t answer, the cat said, “If you don’t know where you’re going, any road will take you there.”

Don’t get lost in the forest of finance. Find your purpose and choose the clearest path to reach it. Good financial advice can provide you with “maps.” Or, you can get help from a financial professional. It’s best to choose a fee-based advisor for more objectivity.

Next: Free Lunch? It’s Probably an Illusion →

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