ILLUMINATION
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ILLUMINATION

A Little Taste of How Mr. Rich Get Richer

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“Compound Interest is the 8th wonder of the world.

He who understands it…earns it.

He who doesn’t…pays it” — Albert Einstein

Being a high income earner does not make you smart with money.

And it certainly doesn’t make you rich.

There are plenty of people earning $100K+ salaries who live only a couple of paychecks away from being dead broke.

In fact, if you were to do a simple calculation of income and expenses, it’s quite possible that you have better finances than many of the “high-rollers” you see strutting around the business district of your city.

So what does it really take to achieve financial success?

Poor Approach

Imagine that you are a young professional living the so-called “dream”.

You are only 35 years old and you’ve just landed an important job in corporate management. You are now pulling in a whopping $100,000 a year and you have complete job security.

BOOM!

But as you settle into this new routine, your excitement and sense of importance start to fade. You realize that the work is stressful and you would much prefer to be retired and playing golf in peace.

Typical!

With your sights now set on an early retirement, you decide to grind it out for the next 25 years. As you carry on earning your $100,000 income and focusing on your future plans, you manage to save a massive $30,000 every year.

Now let’s fast forward 25 years.

You’ve done your time and now, at the ripe age of 60, you have a pile of savings in the bank.

$750,000!

Unfortunately, the cost of living has been rising over the past 25 years and you realize your retirement plans are going to cost you at least $50,000 a year.

For every two years of hard work you put in on the job, you can support yourself for just over one year in retirement.

You sacrificed 25 of your best years, saved everything you could, spent most of your life waiting for the fun to begin and ended up with only enough money to survive another 15 years!

Clearly just having a “good” job does not make you rich.

If you want to really be richer, you have to find ways to make your money work for you.

In this world, only the smart investor wins “The Money Game”.

Wealth Doesn’t Add Up

“The Money Game” creates a few winners and many losers. And what separates the two is a special set of knowledge and skills that influence the way we approach and handle our day-to-day finances.

If you want to have any chance of successfully competing then you must understand the rules of the game and have the right strategy to make financial progress.

And yet, how do we naturally approach the game?

Most people believe money is a game of adding/saving and subtracting/spending over time.

They work hard, collect their money for the week and their bank account goes up a little bit. And that’s where it sits.

Motionless.

Purposeless.

A worthless number just waiting to do something useful… like, be spent.

So what’s the problem here?

The problem is, we bust our ass to get money… only to make our money do nothing!

When your money never moves, life is always a grind.

The natural approach makes financial progress a slow and exhausting process.

No one gets rich by adding up money over time — they get rich by multiplying.

Money Doesn’t Grow on Trees

“Money is a seed — you can consume it, you can store it, or you can plant it.”

Yes Mom, we know that money doesn’t grow on trees. But that doesn’t mean it can’t grow!

The purpose of investing is to plant your money and patiently allow it to grow over time.

How your wealth grows will all depend on where you invest and what happens over time to influence the growth pattern of your money.

It’s obviously impossible to predict, so to keep life simple we’re going to assume that our money will grow at a generous rate of 10% per year.

How does this fixed rate affect our money over time?

Most people assume that earning the same rate of return, or interest rate, each year will make their money increase by the same amount.

But does it?

Let’s imagine you invest $1000 in the stock market and make a 10% return per year. Doing a quick calculation ̶i̶n̶ ̶y̶o̶u̶r̶ ̶h̶e̶a̶d̶ on your phone, I’m sure you can work out that 10% of $1000 is $100.

Clever cookie!

“So are you telling me that I will make $100 every year without doing anything!?”

Don’t sell yourself short.

At a 10% rate of return, $100 is the amount you make on $1000. But realize this is only your starting amount. You do not simply make a 10% return on your $1000 over time, you earn a 10% return on the total amount you have invested.

Therefore, as your money grows bigger, your returns also grow and the speed of your wealth increases. The longer you keep your money invested, the bigger it grows and the more money you make!

The Rich Rule — Money Makes Money

It’s as simple as it sounds. Money has the power to work for you and generate income across your entire future.

But there is more to it than that.

Never forget, money is a number — it’s math.

The true magic of investing takes place when you allow the mathematical law of “compound growth” and time to take full effect on the growth pattern of your money.

Money does not just steadily increase…

…compound growth follows an exponential curve, allowing your money to pick up speed and grow faster over time.

This is The Rich Rule in full effect.

Your money is making money, and the money your money is making is making money!

Make sense?

The more time you have, the more speed your money can gather and the more wealth you can create.

Therefore, the younger you are, the more value your time has — but only if you know how to use it.

Obviously you can’t invest and grow money for tomorrow that you don’t have today!

It takes the right action and attitude to manage your finances and use your time to your advantage.

Compound Interest in Action

Imagine if your wise Grandma had chosen to smartly purchase $1000 worth of stocks for you 40 years ago.

Once again, let’s set the default rate of return at 10% per year.

With $1000 invested and compound growth doing the work, this creates a $100 return after one year. At this point, the investment is worth $1100 — the original $1000 plus the $100 return.

Now, it’s over the second year where the true magic of compound interest starts to take effect, as the 10% return on the investment now starts working on the original $1000 and the $100 return.

This $100 of growth contributes to the $110 return that Grandma makes in the second year, increasing the value of the investment to $1110.

And by the time you get your hands on this money, 40 years on from when your Grandma first invested, you have over $54,000.

Thanks Grandma!

And why not carry on the trend and keep your money invested to help you buy a house in 10 years?

By then, you will have an investment worth almost $150,000!

This is how Mr. Rich makes the most of his time.

Sure beats sitting in an office cubicle, slowly drip-feeding a stagnant bank account.

However, in this world compound growth is a two-way sword, as it can be your best friend or your worst enemy.

Smart investing allows you to combine the power of compound interest and time to build wealth.

At the other end, compound interest is also the reason why many of us lose control of rapidly growing credit card debts. The banks can also use the power of compound growth and time to take an increasing amount of money from us and bury us in snowballing debt.

Working Hard & Hardly Working

Building wealth through the power of compound growth is a two-step process.

We all take the first step of going out and earning a living, or making “active income”.

This is step one - the hard part of “The Money Game”.

Everyone understands this step, as it’s what we spend a quarter of our lives being prepared for in school.

But the second step to financial success is one that few will take — using money to make money. This is called “passive income” and this type of income allows The Rich to get richer.

The reason this type of income is called “passive” is because it takes much less effort to make. You can sit back as your money works for you and continues to increase its level of earnings over time.

Passive income can be made while you sleep, when relaxing on holiday and even while you’re out earning a living.

“If you don‘t find a way to make money while you sleep, you will work until you die” — Warren Buffett

Compared to a doctor or a lawyer earning a high active income, passive income allows you to continue making money with less time, effort and sacrifice. Passive income won’t require you to wake up early, there are no fixed hours for when you must give up your time, and you can be your own boss and make your own decisions.

So, as our money continues to work and passively make more money, what can this ultimately lead to?

The highest peak of financial success is “financial freedom”.

This is the point in the future where you have enough money and passive income being generated to afford a comfortable lifestyle without needing to actively work a job.

As a long-term investor, you can progress towards earning enough passive income in the future to replace the amount of active income you need to afford your living expenses.

Or in other words, your money works to pay the bills so you can experience the luxury of having true freedom in life.

Choose Your Cost

The ability to harness the financial power of compound growth is the defining feature that separates The Rich from the Average Joe’s — who work hard for every dollar, leave their money to gather dust in the form of stagnant cash or old garage junk and make little financial progress over time.

Clearly, harnessing compound growth and building wealth does not happen by accident.

It takes a wealthy mindset, effort and action to maximize the long-term growth of your money. Although, it’s not nearly as much effort as the common alternative of trading every ounce of your time and energy for every dollar you collect.

With a greater awareness of money and an attitude set on creating wealth, the flow-on effect of maintaining financial balance today and tomorrow becomes much clearer.

Because money can make money at an increasing speed, any amount of money you don’t use today can be invested to start working for you and creating more money for the future!

As you start to understand the math and nature of compound growth you realize that time and patience are your most effective weapons in life.

By learning to live in financial balance, you help to boost the total value you gain out of your limited money.

This is how you shift to a wealthy mindset.

More Than Math

When it comes to our personal finances, many of us naturally lose focus in the presence of math — as our minds seek out the sensory distractions around us that are hard-wired to our natural reward systems.

Remember, at the end of the day, money is just a number.

Maybe that’s the reason why our schools make math so mind-numbingly boring — to help us glaze over the fact that personal wealth, freedom and power are nothing more than a bunch of numbers in a system.

The secret to your financial progress and future success are to see through the boring numbers and realize they are a thin veil — a guise to divert our attention towards the catchy jingles, the wafting smells and the bright colors of consumerism.

Yes, math is boring — but a better life is not.

Don’t be fooled, your life is too important and the time and energy you spend earning an income is too valuable to be wasted.

Your money is your future.

Liked this post? Be sure to Follow, check out The Divine Dollar and visit Real Money Guru for a fresh perspective on money.

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