The Easiest Path to Automatic Wealth
This is my shortest ever post, but possibly one of the most valuable.
I tell my kids to save as much as they can while they're young; before they're destroyed by our society's out-of-control consumerism.
I also tell them to pursue work that lights them up – whatever comes naturally to them and that they truly enjoy – not the kind that pays the most money. The reasons are two-fold.
- They don't need a high-paying job to become wealthy. They just need to employ good money habits.
- If they do work they love, they'll be happy most of the time and they'll never ‘work' a day in their lives.
So a while ago, I constructed a spreadsheet to illustrate what would happen if they saved $1,000 in their first year. Then a $1,000 more the following year, and so on.
So to explain, in year one they'd save a grand. The the next year, two grand, and the next, three grand.
Assuming a long-term average return of 7%p.a. (in a Vanguard index fund, for example), the results are quite alarming.
When You Start Matters Most
Also, to show them how important it is to start early (so compounding can work its magic), I included a few extra columns on the spreadsheet. These show with hard data, what happens if you wait five years before you start. Then ten. Then fifteen.
The punchline is this:
- If you start at 15 years of age and do this for 40 years, you end up with $2,652,766.64 when you're 55.
- If you wait 5 years and start when you're 20, you lose almost $1,000,000!
- If you wait 15 years and start when you're 30, you lose $2,000,000.
I wish I knew this when I was a teenager.
And just about anyone should be able to do this. If you're smart about it, you'd squirrel away much more in the beginning, too, because that's where the real power is. Everything you contribute in the early stages gets the greatest benefit of compounding because it's in there the longest.
If you start off with $3k instead of $1k, and add $1,500 extra each year instead of $1,000, the outcomes improve dramatically. You'll reach $1M five years earlier, and after 40 years, you'll have almost $4.3 million instead of $2.6 million.
Teach this to your kids now. And if you're not doing it yourself, start today. It's certainly better late than never!
To get the full spreadsheet, with input fields for the starting amount, extra savings each year and the % rate of return, click here. It's free.
Get the full spreadsheet, complete with input fields for the starting amount, extra savings each year and the % rate of return, here: It's free. 🙂
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Disclaimer & Disclosure: I'm not a psychologist, and I'm not a financial advisor's elbow. This material doesn't constitute financial advice but rather a collection of personal opinions, based on my own experiences. Some of the links on my site are affiliate links, which means that if you make a purchase, I will earn a small commission. This commission comes at no additional cost to you. I provide links to services or products I have used and liked or researched and recommend. Please do not spend any money on these products unless you believe they will be beneficial to you
Also published on Medium.