We’re all thrust into this thing called life. We’re then forced to make a living without given a real road map on how to get financially independent. What we’re taught in school are the fundamentals such as math, English, and exercise. Then we’re set free to survive in the world out there.
We’re graded on our aptitude. Johnny, if you’re good at science, then you should become an engineer. Sally, you should become a nurse, because you have caring empathy towards others.
What’s not taught, is how to earn money and save it, this to enjoy the good things life has to offer.
As a result, many constantly worry about their welfare as adults. What we’re not told is the majority of us will be broke when we’re about to retire.
We live in a paycheck to paycheck economy. We never seem to get ahead, or be able to save for that rainy day let alone retirement.
Things need to change, but most have no idea how.
We have no idea how to begin this quest of gaining financial independence, to gain the security we need.
Developing A Financial Plan
What we need to do before we grow old, is step back and develop a financial plan. Envision our retirement, contemplate the reasons why there are some who “have,” and others who don’t.
Know the reasons why some become rich, and why the general majority remains poor.
What is it, that these successful wealthy individuals do differently.
What are the principles they abide to, the process on how they created their personal wealth.
The Principles Of Wealth
There’s no need to be a financial genius, to decipher what these principles are. The concepts that those who are independently wealthy, have created for themselves.
It appears once we know the elemental process, we can then work the numbers to our advantage. So we can then just duplicate it ourselves.
There are certain wealth building principles and techniques, which has stood the test of time.
These are revealed by those who are more successful and wealthy than you or I.
These core concepts, a set of easy to follow numbers on paper, has been extensively crunched and then placed into motion by those who’s created personal wealth for themselves.
1. The Magical Formula Of Compound Interest
The geniuses and the giants of finance among us, have described the growth of compound interest as being the “Eighth Wonder of the World.” This for good reason.
Once numbers compound, the effect is often referred to as “Rate and Time.”
Compound interest is interest calculated on the initial principal. This also includes the accumulated interest from previous periods on a deposit or loan.
Compounding allows the interest which is earned, to get added to the original initial investment. Then the next series of interest, is calculated to the sum of the previous, and the addition continues.
So what happens, is the interest is earned upon the sum and the interest. What compounding offers, is the effect of being able to exponentially increase the value of the initial investment.
Compounding And The Rule Of 72
This concept is simple yet extremely powerful as the numbers don’t lie. Words can’t do it justice.
What the “Rule Of 72” equates to, is the number of years (or months) which it takes for your money to double itself.
For instance, say you have $1000 that’s invested at 10% interest per year (or monthly).
If you’re wanting to know how many years or months, it would take that original $1000 to double to $2000.00 at 10%, is when the rule of 72 comes in.
At 10% interest, it would take 7.2 Years or (7.2 months). 72 divided by (10%) = 7.2.
2. The Investment Of Residential Real Estate
One of the best traditional methods of acquiring wealth, is investing in Real Estate. As the saying goes, they ain’t making any more land.
The stats show 95% of the millionaires in the world, have generated their wealth through real estate property ownership and investment.
To many, that’s no surprise since developed living quarters is a scarce commodity, as everyone needs a place to live.
It’s estimated there’s approximately 1/3 of the population who rents. Since living somewhere is a necessity, it will always be in demand.
As the population increases, as more young people are released into the population, what they need is some type of shelter.
So the core basic law of supply and demand comes into effect, which ensures real estate prices are guaranteed to increase, in most economic conditions.
Financial institutions, consider property ownership to be one of the most stable investments. It’s the reason why banks will give you a mortgage, and will finance the majority of its value.
3. Using Other Peoples Money (OPM)
Using Other Peoples Money is key for the wealthy, because it’s capital that’s not theirs. They then leverage that money, to realize greater results.
The word leverage, is derived from the word “lever.”
When it comes to physics, a small amount of force that’s applied on one end of the lever, is able to produce exponential force. This much greater than what’s initially exerted.
What the lever or leverage has, is the ability of multiplying the power that’s exerted.
When it comes to investing, leveraging is when you deposit a small portion of your own capital, such as in real estate.
For instance, you place a 10% deposit on a $300,000.00 home, and then mortgage the other 90% percent.
The capital growth you benefit from, is calculated on the entire $300,000.00, and not the $30,000.00 which you personally contributed. Doing so has the effect of substantially multiplying your capital gains.
Leveraging allows you to purchase a greater more expensive piece of property, than if you were just using your own money.
Controlling any type of asset which has a higher value, means the compounding growth has a lot more to work with.
As a result, your net worth will increase that much quicker.
Leveraging multiple properties for instance, allows you to build an investment portfolio a lot quicker than otherwise possible.