subject: The Eighth Wonder Of The World [print this page] If you truly are a student of wealth, if you truly are in synch with the words that you say and the ostensible efforts that you make, you would seem to be demonstrating to yourself and to the world that you're committed to wealth.
But I say, if you truly are, you will become friends with the concept of the leverage of compounding interest. You will not think of high income all by itself. The higher the better, we all know that-but by itself, it's not going to carry you to the grave.
Speaking of which, I recently had a client who came in just the other day who was concerned that it was too late, that it had gone too far, you know, yadda, yadda, yadda-the normals.
I looked at him and made some inquiries. It turns out he's 55 years old, so he's in his midlife. Right, he should be concerned. I said, "Well, let's gather our resources. Let's see what we can do." And his case, of course, is different than yours or any other individuals, but it is illustrative. It's not to be considered impressive, either because it's exceptionally good or exceptionally bad. It just is.
In his case, he's got $25,000 stashed away, and he believes that he can relatively easily set aside an extra $5,500 every single year. Basically, the plan we came up with doesn't involve taking money from his current budget-it's about doing things to earn more income, motivated by the light at the end of the tunnel.
Because here's what we figured out. We have ways that can make him zero percent interest, of course... that's just putting it under the mattress. We have ways that can make him 10%, 20% and even 30% interest. And if you look down the road, if a man puts in $25,000 plus $5,500 every single year, he's setting aside some serious cash.
Look, starting that way, in five years, at 0% interest, he'll have $52,500, in 10 years $80,000, in 15 years $107,500, and in 20 years, the horizon that this particular gentleman wanted to look at, $135,000.
Now, does $135,000 sound like a lot of money? I doubt you believe you could live the rest of your life from age 75 till death at 105 (you'd better plan on living longer rather than shorter, you don't want to outlive your money, like I've seen a lot of people do.
Look, putting aside $5,500 a year, less than $500 a month shouldn't be much of a strain for a 0% interest approach.
Of course, when you're saving, the different variables control how much you end up with. When you start, the interest rates, more money, less money. Everything makes a difference. Including I would recommend you get a self-directed Roth IRA, because, though you pay taxes on the original contribution, you never pay taxes on any withdrawals you make after age 59.
Let's compare that with a strategy we teach that could easily earn him over 30% per year. Now, if he had this discipline where he took that original scratch and never touched it again, and he adds $5,500 a year to it-less than $500 a month-and does this for the next 20 years... now does $135,000 sound big?
Over 20 years, it doesn't sound that big-especially when you compare it to the fact that if he had put that same money out at 30% interest, he would have over $8 million! Eight million versus $135,000-the magic of compounding interest. The Eighth Wonder of the World.
Become friends with your financial calculator.
You should have a chart, as I do, of these things gridded out...as we made for this client. We did it at 0% interest, 5%, 10%, 15%, 20%, 25%, and 30% interest, going down...each of these will be horizontal columns. In those other columns, we have the results. What are you going to have in five years, 10 years, 15 years, 20 years-or depending on your age, 25, 30, or 40 years?
Convince yourself. If you are a true wealth student, you will do this compounding interest exercise. You will and you do have a financial calculator to think about, dream about, and work out. It's your financial prosperity-your financial future.
