Understanding how money work is the first step to building wealth.
Remember, money is a tool. When used properly, money can build you great wealth. But, when used in the wrong way, you can be digging your own grave.
Consider this your user guide to money.
The Power of Time
Time can be your worst enemy or your greatest ally. No matter where you are in life or in building a financial strategy, the key is to begin saving now. The sooner you begin, the less money you need to set aside to create a solid financial future.
Mr. Save Early saves $3,600 per year for 7 years in an 8% tax deferred account.
Mr. Wait Longer starts saving the same $3,600 per year for 17 years in an 8% tax deferred account, 7 years later than Mr. Start Early.
Procrastination is one of the main causes of failure.
Pay yourself first each month, so you have money to invest and take advantage of the time and compound interest.
Don’t wait until you pay off all your debts to invest. That’ll be too late.
The Wealth Formula only works with early investing, high rate of return, and minimizing tax.
Make small changes in your lifestyle and spending habits to save at least $10 a day.
Related article: Turn Your Cash Flow from Negative to Positive
The Rule of 72 is an estimation of how long it would take for any amount of money to double.
You simply divide the number 72 by the rate of return, and the result is the approximate number of year for your money to double.
Take a look at the following hypothetical example that shows how an initial $10,000 investment grows over time.
Notice how a $10,000 investment at age 29 doubles faster as the rate of return increases. Your $10,000 compounded to a grand $640,000 at age 65 with a 12% return versus a merger $40,000 at 4% return.
That’s the magic of compound interest - money keeps making money, which continues to make more money, and saving early.
That’s exciting…but consider the interest rate on your credit card.
Is it 18%? Or higher?
The Rule of 72 can work against you just as powerfully as it can work for you.
The Rule of 72 does not consider impact of taxes. Taxes can increase the amount of time it takes for money to double.
Money or wealth needs time and compound interest to grow.
KNOW YOUR INVESTMENT RISK
Stock market fluctuation can greatly influence how fast and how much your money can grow. Any loss will take an even great rate of return to recover. Therefore, you want o avoid risk of loss as much as possible.
Don’t underestimate even a small loss of 5%. It’ll take 10% to recover back to your previous position. A 20% loss will take a hefty 40% return to recover.
So proceed with caution when investing in stock market, if that’s your choice of investment.
Related article: Invest in Real Estate
In addition to procrastination, tax and inflation are also enemies when trying to build and maintain savings.
Tax and inflation is like the infection that eats at your money tree. However, you cannot avoid tax and inflation completely.
But you can increase your odds to minimize their damage.
Related article: How to Become Rich and Build Wealth