We’re all thrust into this thing called life, forced to make a living, without given a real road map on how to get financially independent. What we’re taught in school are just the fundamentals such as math, English, and personal growth. Then we’re set free into the wild 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 we then do is comply.
What’s not taught is how to earn money, this to enjoy the good things that life has to offer. As a result, many constantly worry about their finances. We’re not told that the majority of us, will be broke when we’re about to retire.
We live in a paycheck to paycheck society. We never seem to get ahead, or be able to save for that rainy day. Things need to change, but we don’t know. We have no idea how to begin this quest for financial independence, to gain the security that we need.
Developing A Financial Plan
What we need to do before we grow old, is to step back and develop a financial plan. Envision our retirement, contemplate the reasons between those who “have,” and those who don’t.
Knowing the differences of those who achieve, and the general laymen among us. What is it, that these successful wealthy individuals do differently. What are the principles which they abide to, the process to create 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, as revealed by those who are more successful and wealthier 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’ve already created enormous personal wealth.
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,” and this for good reason.
When numbers compound, the effect is often referred to as “Rate and Time.” The reason being, the longer that the time expires, and the higher that the growth rate escalates, the greater that the effects of compounding becomes.
How compounding works, is it allows the interest which is earned gets added, to the original principle. Then the next series of interest that’s earned, is calculated to the sum of the previous principle, and the addition continues.
So what happens, is that the interest is then earned upon 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, but using 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 wondering how many years or months, it would take for the money to double to $2000.00 at 10%, this is when the rule of 72 applies. 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 biggest traditional methods of acquiring wealth, where the stats show how 95% of the millionaires in the world have generated their wealth, is through real estate property ownership and investment.
To many, that’s no surprise since the earth isn’t making any more land, and people need a place to live. It’s estimated that 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 being released into the general public, what they need is some type of shelter. So the core basic law of supply and demand comes into effect, ensuring that real estate prices are guaranteed to increase, in almost every economic condition.
Financial institutions, consider property ownership to be one of the most stable investments, and the reason why they’ll loan, “mortgage” you the majority of its value.
3. Using Other Peoples Money (OPM)
Using Other People’s Money is key for the wealthy, because it’s using 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 much greater than what’s initially exerted. What the lever then does, is it has the ability of multiplying the power that’s exerted.
Leverage Financing – When it comes to investing, leveraging is when you deposit a small portion of your own capital, say 10% on a $300,000.00 home, and then mortgage the other 90% percent.
The capital growth that you benefit from, is calculated on the entire $300,000.00, and not the $30,000.00 which you personally contributed, which has the effect of substantially multiplying your capital gains.
Leveraging allows you to purchase and own 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 that 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.