There’s an old proverb that states, “the best time to plant a tree was 20 years ago. The second-best time is now.” This saying relates to many endeavors but is especially pertinent to building wealth. There’s significant value to investing early in life and allowing the money tree to accumulate, but it is also never too late to save and build a nest egg.
To reach financial security at any age requires action and understanding of some fundamental investing and saving truths. Here are five to get you on the path towards financial security:
Pay Yourself First
You’ve likely heard the phrase “pay yourself first” in terms of planning for your financial future. But what does that mean? It is putting money aside automatically before you spend it on bills, takeout food, or online shopping. So, whether it comes right out of your paycheck or is deducted on a schedule from your checking account, that money goes toward savings.
Decide on a percentage to take from your income and put it aside to start securing your future. Many people spend most of their monthly income out of habit. Try putting $100 aside every paycheck and you will realize your bills are still met. Increase the savings amount incrementally every 3 months to $150 and then $200 and beyond to take advantage of additional long-term growth.
Start Saving and Investing Now
Compound interest is a powerful tool, but it only benefits the people who start investing, the younger the better. Time plays a huge role inside of wealth building and is the #1 most neglected step inside of wealth building. Get on the train and let it work as long as possible.
As your commitment to monthly or biweekly savings grows, so will the power of your compounding. Imagine hiring an employee who works for you for life, except they work for free. Now imagine that employee, over the course of their career, continues to hire more free employees to work for you. And the kicker? All of these employees pay you for the privilege of working for you. This is essentially how compounding puts your money to work for you. Think about “employing” as much money as possible in your early years to achieve your wealth goals.
Protect Your Money
Compound Interest can only take root if you choose quality investments that do not consistently lose money. Investment losses impact investments more than gains because losses cut into your time, which is the one asset you cannot recoup. Risk is contrary to gaining wealth, so your investments need security and you should minimize risk to achieve the most compound growth.
Understanding risk and its influence on your pursuit of wealth means talking to an expert in secure compounding. Many “financial experts” promote “No risk, No Reward” mentality which unfortunately is not the best way to take advantage of compound interest.
Enjoy that Compound Interest
The time your money has to earn interest (along with the new money you continually invest) builds to your eventual wealth. Not starting early is the most neglected step for wealth building. This is due to the power of compound interest plus time.
The math backs it up and helps visualize the power of compounding:
- Two people; Mike and Megan are best friends at 18.
- Megan starts investing at 18, starting with $100 in an account, and she sets aside $100 a month for the next 50 years, at an 8% return.
- Mike holds off investing until he is 43, and starts with $10,000 cash, and puts away $500 a month for 25 years.
The results? At 68, Megan ends up with $804,119 while Mike has $552,170. However, the difference is not just the final tally. Over the same period of time, Megan used $60,000 of her own money to invest, while Mike contributed $150,000 over that span yet ended up with less total money.
Secure the Right Kind of Leverage
Leverage in the investing sense is using other available assets at your disposal to increase the amount of money working for you. Leverage is not some mythical thing that’s only reserved for the rich and investment bankers, it’s available to nearly everyone. Used inside of secure compounding, leverage can provide an accelerated path to wealth and financial freedom. Secure leverage does this by increasing the amount of money working for you to produce compound interest. However, there are several types of leverage. Most leverage is extremely risky and can cause financial harm in a stock or real estate down market. Using secure forms of leverage to achieve reliable growth can help you achieve financial security in a shorter time frame.