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How
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The
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This
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Jim
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Take
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-
Patrick Coffey
"Youth
is a wonderful thing. What a crime to waste it on children."
-
George Bernard Shaw
Starting
Young - The Miracle of Compound Interest
By
Michael Masterson
If
you take a penny and double it every day for a month, how
much would you end up with? A hundred dollars? A thousand
dollars? How about a million dollars?
Not
even close.
If
you start with just a single penny and double it every day
for 31 days, you end up with ... $21,474,836.48. More than
21 million dollars in a single month!
This
is an example of the power of compound interest.
The
original penny turned into two, but then those two turned
into four, and the four turned into eight, and so on. The
growth of your money sped up because not only was your original
penny collecting interest - but all the pennies you received
as interest also began to earn interest. And so the growth
built up ... or compounded.
That's
how you get the term "compound interest."
And
that's how, by saving and investing over a long period of
time, you can get rich.
I
wrote Automatic
Wealth for people who want to get wealthy
in a relatively short period of time - seven to 15 years.
But not everyone needs such an accelerated program. If you're
young and just starting out on your wealth-building career,
you can take the leisurely approach by putting "the
miracle" of compound interest to work for you. That's
the idea behind my latest book, Automatic
Wealth for Graduates.
As
I explain in Automatic
Wealth for Graduates, there are three
components to compound interest:
1.
How much you invest.
2.
What return you get on your investment.
3.
How many years you stay invested.
For
the miracle of compound interest to work its wonders, you
need 30 or 40 years of savings. So, today, let's assume that
you are in your twenties (or that you know someone who is
that you can pass this information along to). And let's take
a look at this "automatic" road to financial independence.
Start
Saving Right Now
To
take full advantage of the miracle of compound interest,
you must begin to save and invest immediately - as soon as
you start earning an income. I recommend that you set an
aggressive goal for yourself: to save 15 percent of your
pre-tax income.
Saving
15 percent of your income when you are just starting out
might seem like a challenge. And it is. But if you are willing
to make some reasonable sacrifices (such as sharing an apartment,
driving a used car, and shopping for bargains), you'll be
able to do it.
What
you earn on your savings depends on what type of investing
you do. If you invest in the stock market - which is the
way most people invest - you can expect to make between 10
percent and 13 percent on your money. (Stock market historians
will tell you that if you go back to the beginning of the
20th century, the average ROI - return on investment - of
the market has been about 10 percent. But there was also
a long stretch - from 1950 to 2000 - when it returned 13.2
percent.)
Now
let's say that, with your first job, you start earning the
average salary made by all college grads when they get out
of school. According to the National Association of Colleges
and Employers, that's $30,337 a year. And let's say that
you are good at your job, so you get a consistent annual
raise of 4 percent. So you'd be making $43,179 a year 10
years from now, and $140,046 in 40 years. This means that
you will not only be making more money, you will also be
saving more money.
If
you consistently - that means every year - deposit 15 percent
of your income into investments, compound interest will begin
to accumulate like you wouldn't believe.
Just
by investing 15 percent of your income and having a very
ordinary income-earning life, you'd be worth about $5.5 million
at 65 when you are ready to retire. If you decided to work
an extra 10 years, till you were 75, you'd be worth $15 million!
Now
let's take a look at the same situation with only one difference:
Let's assume you are able to get that ROI of 13 percent.
That would bring your net worth up to $15 million by the
time you are 65. And if you keep saving till you are 75,
you'd be worth 50 million bucks!
I
know these numbers seem incredible, but we are just warming
up.
Now
let's assume that you become a savvy investor and earn 18
percent on your savings. In that case, you'd be worth a million
at 41, $6 million at 51, $15 million at 56, $35 million at
61, and $200 million by the time you are 71!
Mindboggling
... but True
I'm
presuming you are blown away, as I am every time I look at
numbers like these. The skeptic in me jumps out and challenges
the assumptions as they apply to the three components of
compound interest:
1.
How much you invest.
Are
the invested amounts realistic? In my opinion, they are conservative.
Anyone with discipline can learn to save 15 percent of his
income.
2.
How long you invest.
That
is not a debatable point. It's simply a matter of mathematics.
Compound interest becomes miraculous after about 30 years
of investing. That's why it is so important - and why you
have such a great advantage - when you start young.
3.
What ROI you get.
You
may not be able to earn 18 percent on your stocks throughout
your career. But if you learn how to invest in local real
estate - which is something you can do even now in a highly
overvalued real estate market - you can expect to earn about
30 percent on that. And if you start your own successful
business one day, you may well see investment returns of
50 percent or more over time.
Putting
aside, for the moment, the 50 percent-plus returns you could
hope to get by starting your own business, let's see what
would happen if you (1) invested a portion of your savings
in stocks, and got only a 10 percent return, and (2) invested
a portion in real estate, where you averaged, with leverage,
the expected 30 percent ROI. (Again, we will assume you start
with an ordinary income that increases at an ordinary rate
and that you save 15 percent of it.)
If
we add the interest of both investments together, you will
reach $2 million dollars before your 41st birthday. If you
still choose to continue to work and retire at 65, your investments
will have bloomed to approximately $1.1 billion. And at age
76, you will have over $21 billion in accumulated interest.
Right
about now, you may be wondering, "If it's so easy to
amass such a fortune, then why isn't everyone rich?"
The
answer is: Almost no one does what I suggest. No one puts
away a consistent amount of their income. Nor do they start
young. Nor do they stay invested in a consistently conservative
portfolio of stocks and real estate. But the people who do
it DO become this wealthy.
The
Snowball (or "Doughball") Effect
As
your income increases, if you maintain your lifestyle (increasing
your spending but not by too much), you'll get wealthier
faster because you will save more. By taking steps to drastically
improve your income and consistently invest 15 percent or
more, you will retire a multimillionaire.
Compound
interest begins to work right away. The second year, you're
already making more interest than the first year ... even
though you're always receiving the same interest rate. The
third year, you're making more than the second year. And
so on. As a result of the compounding, your investment grows
geometrically over time - like a snowball rolling down a
hill, becoming bigger and bigger.
The
longer you stay the course, the greater the wealth build-up
becomes. And the sooner you start, the better.
Time
Is on Your Side
With
a beginning salary of $30,337, you'll see about $22,500 in
after-tax income. Before you do anything else, put 15 percent
of your gross income ($4,500) into conservative stock investments.
That leaves you with about $18K to live on - about $1,500
a month. Not a lot. But if you are careful about curbing
your spending, you won't have any trouble.
You
can pay $750 for rent. You may have to split an apartment,
but living with other people can be a great experience. You
may end up living with a friend who is in much the same position
that you are. Maybe you work at similar jobs. Maybe your
friend even makes a few thousand dollars more than you do.
He might wear fancier clothes. He might spend more on entertainment.
He might have a new car. But you'll be the one who is able
to retire comfortably at a relatively young age. And he may
be forced to continue working long into his old age.
How
can two people who make the same income end up in such different
positions? The difference is, your friend isn't saving anything.
The difference is, you'll be able to retire $13 million richer
than your friend ... because, when you were young, you began
to consistently, religiously invest 15 percent or more of
your income.
(Ed.
Note: The above article was adapted from Automatic
Wealth for Graduates, Michael Masterson's
newest book.
Today's
Action Plan
If
you're young enough to take advantage of the "miracle" of
compound interest, start saving ... today.
Even
if you are living from paycheck to paycheck, you must start
your saving program now. You must get your hands on some
amount of money and invest it immediately. Aim for 15 percent
of your gross income. If you don't have that much cash, put
away as much as you possibly can.
By
starting now, even if your income is small, you will create
the habit of saving. When saving becomes habitual,
it becomes easier. And anything that you can do easily, you'll
do better, more often, and longer-term. The result, over
time, will be significant compounding wealth.
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The
Safest (and Fastest) Way to Shape Up
By
Jon Herring
Spring
has arrived. And for many people, that means renewing a New
Year's resolution to get back into shape. Starting a fitness
program seems simple enough. Just throw on your running shoes
and head out the door, right? Well, not so fast. In fact,
launching into a "cardio" program could be the
worst place to start.
If
you are out of shape and overweight, repetitive daily exercise,
such as running, could predispose you to muscle and joint
injuries. So instead of helping you get fit, plunging headlong
into a cardio program could knock you right out of your fitness
program before you even start to achieve health benefits.
If
you are out of shape and want to get started on the road
to fitness, here's what you should do instead:
Alternate
between several low-impact activities. Rowing, cycling, swimming,
or walking on a steep incline would all be good choices.
When you do these exercises, engage in brief intervals of
high-intensity exertion, followed by brief periods of rest.
Then repeat six or seven times.
The
low-impact exercises will save your joints and muscles from
injury, and the interval training will get you in better
shape (and faster) than you would achieve with longer duration,
lower intensity cardio. For more on interval training, read "The
World's Most Powerful Workout" in Message #1471.
5
Ways to Get More Done in Less Time
By
Bob Bly
1. Master
your PC.
Using
a modern PC with the latest software can double, triple,
or even quadruple your output.
2.
Don't be a perfectionist.
That
doesn't mean you deliberately make errors or give less than
your best. It means you stop polishing and fiddling with
the job when it looks good to you. Create it, check it, then
let it go.
3.
Free yourself from the pressure to be an innovator.
Don't
worry about whether what you are doing is different or better
than what others have done before you. Just do the best you
can. That will be enough.
4.
Protect and value your time.
Productive
people guard their time more heavily than the gold in Fort
Knox . They don't waste time. They get right to the point.
They choose who they spend time on and with. They make decisions.
They say what needs to be said, do what needs to be done
- and then move on.
5.
Stay focused.
Successful
people apply themselves to the task at hand. They work until
the work gets done. They concentrate on one or two things
at a time. They don't go in a hundred different directions.
(Ed.
Note: Bob Bly is a popular Early to Rise columnist, self-made
multi-millionaire, and the author of more than 60 books,
including The
Complete Idiot's Guide to Direct Marketing and The
Copywriter's Handbook
He
is also the editor of ETR's
Direct Marketing University: The Masters Edition -
a program to help you start your own successful direct-mail
business.)
Quick
Tip: 2 Books That Belong on Every Writer's Bookshelf
By
Will Newman
Robert
Fiske's Thesaurus
of Alternatives to Worn-Out Words and Phrases is
an excellent resource to help you avoid using cliches in
your writing. And if you already own a copy ... good for
you. But the book is expensive. It goes for $148 on Amazon.
Don't pay that price! Fiske, has produced two newer books
that include even more words and phrases:
1. Dimwit's
Dictionary: 5,000 Overused Words and Phrases and
Alternatives to Them - which
has more detailed descriptions of what to avoid than
are given in the book below.
2. Dictionary
of Concise Writing: 10,000 Alternatives to Wordy
Phrases - which has more words
than the book above, but fewer detailed entries for
each one.
You
don't need to buy both books. Either one would be a good
addition to your bookshelf.
(Ed.
Note: Will Newman, a regular contributor to ETR, is editor
of AWAI's The
Golden Thread online newsletter -
a free weekly alert loaded with marketing secrets, tips,
and insights.)
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Word
to the Wise: Pervicacious
People
who are "pervicacious" (pur-vih-KAY-shus)
are stubborn, refusing to change their ideas/behaviors.
The word is derived from the Latin "pervicax."
Example
(as used by Michael Hawley in a Technology Review article
titled "Things That Matter: Waiting for Linguistic
Viagra"): "In fact, I'm a word nerd. I get a
kick out of tossing a few odd ones into my column, just
to see if the pervicacious editors will weed them out."
