Guess what? There's an extremely simple process to building substantial wealth that's been used by people for hundreds of years. It's so simplistic that a child can understand the math. It doesn't require an education, a substantial income or living out of a box. Anyone can do it, and statistics have shown us that it's the path most millionaires have taken. That simple and powerful process is this;
1) Get a job that pays a salary.
2) Take as much of that salary as you possible can and use it to invest, pay down debt and avoid going into future debt.
3) Keep doing that every time you get paid.
That's it. No seriously, that's it.
Most people will immediately dismiss the above statements. The feedback is incredibly predictable;
"That's not for people like me"
"I wouldn't even know how to invest"
"He's talking about some get-rich-quick scheme"
"I work hard for my money and I'm not taking risks with it"
While these are all legitimate concerns, they represent a tremendous lack of financial education that exists in our country. While my original statement didn't get into how to invest money, or how to choose between investing and paying down debt (we'll discuss that in future posts), the fundamental concept is accurate. But because most people lack a financial education, they immediately write-off sound financial advice. Let's address some of the concerns;
"That's not for people like me" - I'm pretty sure having financial peace is for everyone, but if you don't want it, then I guess that's your choice.
"I wouldn't even know how to invest" - This is actually the easy part. One could take a simple approach of investing in one mutual fund if they'd like. We'll discuss more in future posts.
"He's talking about some get-rich-quick scheme. I'm not doing that" - Quite the opposite actually. Getting rich from investing is actually more of a get-rich-slow scheme.
"I work hard for my money and I'm not taking risks with it" - The bigger risk is not investing and paying down debt. Trust me on that one.
But How Does it Work
The 8th Great Wonder according to Albert Einstein is compounding interest, and he was a really smart dude. For those who don't know, compounding is when something grows at an exponential rate over time. In investing, it's when your initial investment grows and earns interest, and then you earn interest on both the original investment AND the interest, and this keeps happening over and over again. With investing, compounding is your best friend, but with debt it's your worst enemy. As you take a portion of your income and use compounding in your favor (through investing or paying down debt), not only does your financial position begin to improve, over time the benefits begin to multiply.
If all of this is a lot to wrap your head around, please think of it as this. You're going to make a certain amount of money in your life - let's call it $1.25 million. If you use compounding interest to your benefit, you will be able to purchase way more than $1.25 million of goods and services (house, cars, education, retirement, etc...) If you allow compounding interest to work against you, you will be able to purchase substantially fewer goods and services.
Let's look at some numbers
Here is an example of the $1.25 million of career earnings. The person that doesn't invest earns $1.25 million and over time and can purchase only $1.25 million of goods and services. The second person invests $10,000 per year in the stock market and earns a return of 9%. Assuming they don't pull out their investment during this time, they end up with $1.9 million. They worked the same job, put in no additional effort, but can purchase $673,000 of additional goods and services. Meanwhile, the person that borrows $10,000 per year watches their debt balance grow and eat into their spending power, leaving them with only $326,760. This example gives you the basic idea of how the 8th wonder works and the power of its impact.
Stop what you're doing and start carving out as much of your paycheck as possible and put it to work! Invest it, pay down debt if you need to, but put it to work. You'll find that the results can be staggering over time. How staggering? If we projected this graph out another 10 years, the investor would have $2.7 million. So get started now to become an 8th Wonder Wealth Builder.
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