In one word basically, the real secret to becoming rich is “compounding”.
Warren Buffet knows it, and it is one of the basics in his investments. Compounding, along with tremendous returns have made him one of the richest people on earth.
What does it mean then?
It means that as long as you re invest your profit, your money will start growing faster, and faster. Kinda like when you roll a Snowball, and it grows bigger and bigger (sorry, just had to borrow that from the title of the book The Snowball, by Alice Schroeder; which is about the life of Warren Buffett).
I will use an example, which I borrow from the dowtheoryletters. :
It refers to a study, courtesy of Market Logic, of Ft. Lauderdale, FL 33306. It asumes that investor B opens a tax free saving at age 19. For seven consecutive periods he puts $2,000 in his tax free saving at an average growth rate of 10% (7% interest plus growth). After seven years this fellow makes NO MORE contributions — he is finished.
A second investor A makes no contributions until age 26 (this is the age when investor B was finished with his contributions). Then A continues faithfully to contribute $2,000 every year until he is 65 (at the same theoretical 10% rate).
The study shows the incredible results. B, who made his contributions earlier and who made only seven contributions, ends up with MORE money than A, who made 40 contributions but at a LATER TIME. The difference in the two is that B had seven more years of compounding than A. Those seven early years were worth more than all of A’s 33 additional contributions.
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So, the sooner you start, and the longer you keep compounding, the richer you will get.
So, start tomorrow, or even better, today.
Until next time.