A Little Math To Wealth

wealthymattersDuring the early part of the eighteenth century, the French government issued a series of bonds to help raise money. With the decline of the French economy in the 1720s, they were forced to cut the interest rates on the bonds, which drastically diminished the market value of said bonds.  This resulted in the French government having considerable difficulty in raising money via new bond sales.

Le Pelletier-Desforts, Deputy Finance Minister for France, had a “brilliant” idea as to how to raise the value of existing bonds, encourage the sale of new bonds, and earn some money for the government- a trifecta. His idea was to allow bond owners to buy a lottery ticket linked to the value of their bonds (each ticket costing 1/1000th of the bond’s value). The winner would get the face value of their bond, which was much more than what they could get on the market, plus a ‘jackpot’ of 500,000 livres, which would make the winner instantly insanely rich- essentially set for life.

Unfortunately for the government, the mathematics behind this new fundraising scheme was vastly flawed. If a person owned a bond worth a very small amount, with the lotto ticket for the bond costing just 1/1000th of the value, he/she could buy the lotto tickets extremely cheaply, yet their lotto ticket had just as much of a chance of winning as someone who owned a bond for 100,000 livres and had to buy their ticket for 100 livres.  The mathematician, de la Condamine realized that if he was able to buy up a large percentage of the existing small bonds, split into 1,000 livres a bond, he could then buy each lotto ticket for just 1 livre.  If he owned enough of these small bonds, he could quickly give himself the bulk of the entrees in the lotto while spending much less than the jackpot, thus assuring he’d win quite often and always win much more than he put in. Read more of this post

The Dam Analogy

wealthymatters.comA river and a dam across it is a nice way of visualizing one’s finances.A source of income is like a river.To save a bit of it is like building a dam across the income stream.

In real life dams are used to impound water in times of plenty so that it can be used when water is scarce.Deducting money from a salary cheque to fund one’s pension or investing regularly in a mutual fund  via a SIP , is like holding back water in the time of plenty to use when water is scarce.If a person comes by a windfall,say, by selling a business/ winning a lottery/receiving an inheritance etc. and saves/invests the money safely,it is akin to storing rainwater from a freak shower for use later. Read more of this post

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