The first source of plunder upon your wealth is the concept of compound interest. Have you heard that the best thing you can do with your money is to let it compound? Such statements are everywhere. "Compound interest is the next best thing since sliced bread." Do not let these statements fool you. Compound interest is a wealth erosion strategy that has cost the American people billions of dollars.

Why is compounding interest one of the most devastating wealth-eroding techniques? How could having your money grow and compound be bad for anyone? Those who plunder your wealth want you to believe that earning a high rate of interest, and leaving it to compound over a long period is to your financial advantage. Billions of advertiser dollars are spent on promoting this technique to many unwary consumers.

We will present the facts about compound interest. Make sure that you read this material slowly. Use a calculator or computer as you read to verify the accuracy of our numbers and findings. This lesson could save you millions of dollars over your lifetime.

Example:
Suppose a man has $75,000 to deposit into some form of savings vehicle. After doing research, he finds a super money account that pays 10% interest, guaranteed and insured. In today's world, this would be a spectacular savings account. He will compound the money for 35 years to get the full benefit of the compounding of interest. Thus:

$75,000 @ 10% over 35 years = $2,107,680

In looking at the result, most people will say, "This looks very impressive. The money has actually compounded more than 20 times itself. From a single deposit of only $75,000, it is worth over two million dollars. What a miracle!!!!!" Millions of people would pour their hard-earned money into this type of savings account.

Unfortunately, as you will discover, there is no miracle here. It is more like a bad dream. The opposition forces have perpetrated their ingenious plunder on this unsuspecting depositor. The trap and the illusion have been set. In reality, the individual in our example will lose a great deal of money.

Let's find out why this depositor will lose all his money and more. When money is compounded in a taxable savings vehicle like a savings account, treasury bill, zero coupon bond, corporate bond, money market fund, certificates of deposit, income taxes are due each year as the interest is earned. Uncle Sam wants you to show him the money...NOW! He does not wait until there is a withdrawal. He orders the financial institution to send him a report called a Form 1099. This report shows how much interest the depositor earned in a given year. The depositor must pay the income taxes on the interest earned that year although the interest was compounded and not withdrawn.

Suppose, in our example, this man was in a low 28% marginal tax bracket for income tax purposes, how much income tax would he have to pay over the entire 35 year period?

$2,107,680 Gross Value - $75,000 Original Capital = $2,032,680 x 28% = $569,151 in Taxes

The total taxes paid to Uncle Sam over the 35 years in a 28% bracket would be $569,151. This amount of money would be paid out over time, as the interest is earned, not in one lump sum.

Since these taxes were paid with out-of-pocket dollars and not from the investment itself, they must be added to the original cost of $75,000 plus $569,151 or a total of $644,151.

Now let's see how much money the depositor made:
$2,107,680 - $644,151 = $1,463,529

Gross Value - Income taxes = Net after tax earnings & original principal

It still looks good. Even after taxes have been paid, the net earning is still 14 times the original principal. Because this depositor is in a low tax bracket, even after this calculation, he still feels good about his decision to compound his money.

So where is the plunder? It is in the concealment of the real cost of the tax payments to Uncle Sam. Since these income taxes were paid with out-of-pocket dollars, they represent a cost to the depositor. He gave up these dollars to Uncle Sam. Since Uncle Sam will pay him no interest on these dollars, he also lost the interest that these tax dollars would have earned. In other words, if he did not have to pay these tax dollars to Uncle Sam, he would have had both the tax dollars and the interest earned on them, how much money did this person really up by paying those taxes?

With the help of a computer, we can get the answer quickly. The answer for the lost interest on the taxes paid is $773,909. This answer can be derived manually as well. (You may skip this part if you understand our answer.)

Here's how:
Step 1: Compound the principal in the account by 10% to calculate each year's interest.
Step 2: Multiply each year's interest by 28% to calculate each year's tax.
Step 3: Take each year's tax and multiply it by its corresponding factor number.
Step 4: Add up all of your totals. The answer will be $1,343,060.
Step 5: Subtract the total of income taxes paid. The answer will be $773,909.

Now you can see why the opposition forces were able to convince people that compound interest was a good thing. It simply is too complicated for most people to properly calculate. With the use of computers, compound interest can now be easily shown to be a wealth-eroding concept.

Let us again look at the results for this depositor:

Compounding Savings Account at 10%	$2,107,680
Initial Investment	- $75,000
Total Interest Earned	= $2,032,680
Less Taxes	- $569,151
Less Opportunity of Taxes	- $773,909
Actual Wealth Earned	= $689,620

That's not bad. The original investment of $75,000 has grown over 7 times even after income taxes and lost earnings on those taxes have been deducted.

But, the plundering is still not complete. When saving or investing money over the long run, one must calculate the effect of inflation. If this is not done, the true value of the money won't be known.

Assuming 2% inflation over 35 years, every dollar will lose 50 cents in value.
$2,107,680 X .50 = $1,053,840
Value of Account x Discount Value = Cost of Inflation

After 35 years, that means that inflation took $1,053,840 of the wealth away from the account value.

In summary, let us look at the total result our depositor would have with this super savings account @ 10% compounded for 35 years in only a 28% tax bracket.

Compounding Savings Account at 10%	$2,107,680
Initial Investment	- $75,000
Total Interest Earned	= $2,032,680
Less Taxes	$569.151
Less Opportunity of Taxes	- $773,909
Less Cost of Inflation	- $1,053,840
Actual Wealth Earned	= ($364,220)

He actually lost $364,220! Startling but true. Meanwhile, the financial institution will work with his money for all of those years. It will multiply it by using the Secret of Financial Success for themselves.

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