We have all heard that we should start
saving money as
soon as possible, due to the fact that the
earlier we start,
the more we will have later in life. Now, while
this is
absolutely true, the question is, why? What
is it about
putting money away long term that can turn
hundreds
into millions? The answer is compound
interest.
The math and concept behind compound
interest is
easy enough: it is based on stuff we
learned in
middle school, and, just because we are now
dealing
with money, does not have to become much
more
complicated. The process is simply this. Let us
say
you put $100 into a bank account (a CD, for
example), paying you 5% annually. At the end
of one
year, you would now have $105 in the bank,
so the
second year you would be earning 5% on that
$105.
At the end of year two, therefore, you would
have
$110.25. Year three, that would have grown to
$115.76, year 4 to $121.55, and so on. So,
what does
this look like long term? After 10 years, that
same
$100 would be worth $162.89. After 20, the
result is
$265.33. After 189 years, your original $100
would
be worth over $1M (finally).
Now, obviously, becoming a millionaire in 189
years
time is not that exciting. What is exciting,
though, is the
results we can get by changing some of the
numbers,
because compound growth is exponential
growth: it
takes a little time to get going, but once it
does, watch
out!
So lets run the same example, but play with
the
figures a bit. Lets say that, instead of just
investing
$100, you went through your chart of
expenses (if
you need this, email us at
info@abundancebound.com, and
put “Chart of
Expenses” in the subject line), and were
able to
find $1 a day
- $30 per month - to invest with. And lets
say that all
you did was invest this in index funds. (An
index fund
is a fund that basically mirrors market
performance:
depending on what you choose, you
essentially own
a piece of every stock on the market).
Index
funds
have historically grown at 11% (mutual
funds,
by the
way, typically under-perform this – at least
about 80%
of them do – so when people encourage to
just “put
your money in mutual funds” remember that
you are,
generally, paying for sub-standard service -
yuck).
That $30 per month would grow into $1M
in just 53
years - much more exhilarating than the 189
above!
At this point, you may be saying “But I don’t
want /
don’t have 53 years to do this. I want to be
a
millionaire sooner than that, and have money
to
spend on the way there”. So let’s say that
you choose
to get some financial education, follow
the steps of
The Artists' Prosperity
System, and you are
now in a
place to put away $100 per month.
(This is not
difficult – I promise!) Let’s also assume that
you did
your research, and went after more aggressive
investments so that your returns average 20%
annually. At this rate, you would become a
millionaire
in 27 years – well within reach of any of
us. And that
is still only putting away $100 per month! How
about
a $1,000 per month? That will turn into $1M in
14
years. $2,000 per month? 11 years. You get
the
idea.
Now, those numbers may seem like a lot, to
some of
you. If you are caught in the throes of
struggling to
pay the bills, putting time into your artistic
career, and
juggling all the other things you want and need
to do,
an extra $100 per month seems a lot to come
by.
That is where education comes in. Learn
how to put
money away, “forecast” your spending, pay
down
some debt, and increase your income.
Then, as your
career takes off, and your income flourishes,
can you
see putting that $100 a month away? Then the
$1,000? And the $2,000? More? It is extremely
doable. All it takes is education, and a little
time.
Our hope is that everyone will read this and be
inspired to take action about their
finances. Be it
putting $30 a month into index funds (The Motley
Fool is an excellent resource for stock
info, allowing you to paper trade etc. while you
get
yourself comfortable), or registering for The Artists' Prosperity Boot Camp and
eventually branching out
into countless other types of investments,
the key is
action! What are you going to start doing
now that will
mean life will be different for you two, five or
ten years
from now?
There will always be people who will
question
this type of
advice, who think that investment gains of
more than
10% are impossible etc (although they should
ask
Warren Buffet about that). I am sure, in the
same vein,
that there were people who questioned your
choice
of pursuing the arts (I know there were plenty
of those
for me!) I want to leave you with this quote,
from The
Motley Fool, because it sums up the choices
we have
as we go through our lives: “The least
mentioned,
biggest risk of all is not taking enough
risk”.
In a country where 90% of people die poor,
compound
interest can mean you are one of the 10% who
don’t. Understand it, examine it, research
it – then get out
there and put it to work for you!
