WealthWeek

A WEALTH BUILDING TACTIC YOU CANNOT AFFORD TO IGNORE

Do you really need to make that credit card purchase?

Before you swipe and sign, think twice… There is one very big reason why you should hold off and the following article will provide all the proof you need to reach a critical tipping point with respect to your finances.

There is no denying it… Compound Interest is truly the magical financial instrument that we all should use! And, it is possible to turn small monthly investments into staggering amounts with time. So, hold that credit card purchase and read this first!

COMPOUND INTEREST AT WORK

Consider the following example to help you get into the habit of investing your dollars instead of spending it. To arrive at the figures below, I used a simple compound interest calculator over at MoneyChimp. These are the figures I plugged in:

Starting Balance	$1,000
Annual Addition	$6,000
Years to Grow	25
Annual Interest Rate (ROI)	15%
Compounding Annually	1 time
FUTURE VALUE	$1,501,191

.

Now, in 25 years, $1.5 Million won’t nearly be worth as much as it is today. However, all things considered, it won’t be an amount to sneeze at either. For instance, 25 years ago $250,000 was considered quite a bit of money and today it is not nearly worth as much as it used to be. That said, if you had $250,000 lying around, wouldn’t you feel a little better about your finances? I think I can speak for everybody when I say: absolutely!

Now, I define true wealth as having enough money to be able to live the life you desire without ever having to work (i.e.: having time freedom). Since $1.5 Million might not be as much tomorrow as it is today, you will most likely have to employ a few more wealth building tactics in order to secure your financial position, and there are methods you can get into to do this that I have already discussed (or, will be discussing here at wealthweek.com in articles to come). Regardless of how much it [your investment account] is going to be worth tomorrow, there is great value in adding such a savings program into your arsenal of wealth building tactics today.

The fact is, if you follow the example above, it would mean that you would be saving $500/month. While it might seem like a lot to some, saving money is something of an art form. The more you do it, the better you become and the easier it gets. If $500/month is a lot for you now, take heart, it will soon be less of a challenge to put aside that amount into your investment account.

Another sound principle is to sock away 10% of your income every month, no matter what. It’s like having your own personal tax. When you consider the upside potential that compound interest has to offer, sticking to this principle (or, any savings plan you establish for that matter) becomes very easy.

HOW MUCH WILL IT REALLY AFFECT YOU?

How much you end up saving aside for investing will really depend on you and your income, debt levels, etc. However, since I started with the $500/month example, I’ll continue with it to illustrate the following point.

If you ever notice, most people will find any amount ‘too much’ to set aside for investing. The fact is, most people would rather pony up $2000 for a plasma TV as opposed to allocating the same amount towards some sort of investment that can yield them returns, as we’ve seen in this article so far.

In reality, if you were to commit to a plan and save $500/month, how much would it really affect you? Lets see, shall we? There are a few categories of spending that I’ve detailed below where I find people spend a lot of money each month. Typically, they are those small transactions that seem small at the time but add up to a lot by the month’s end:

• Dinning Out - $300
• Daily Lattes - $100
• Magazines/Books - $75
• Alcohol - $200
• Entertainment - $200
• Cigarettes - $125

Now, these all add up to a solid $1,000 and most likely, you don’t do all your spending in the categories above, but it gives you an idea! Long story short, if you’re like most people, many of these categories apply to you. If you were to keep track of your daily expenditures, you would find that you spend a good amount of money on items that you don’t necessarily care for - that is, the spending in these categories is usually more habitual than anything else. Truthfully, you don’t have to give up all your enjoyment, but there’s usually enough room for cutting away a good amount towards investing. Start paying more attention to your daily expenditures and I guarantee you will find some money to put away.

Think about it this way: when you want something - such as a plasma TV - more often than not, don’t you find a way to get it (be it, by saving up for it up or charging it)? It sad, but, because people really want these items, they will commit to getting them more so than they will their futures. At the end of the day, you have to question - do you really want to make your dreams of wealth happen? If so, it is going to require a decent amount of committment and discipline.

Some people cut expenses to achieve their investing goals, while others generate multiple sources of income and yet, others just do both! These are all various tactics and I am all for doing what works and keeps you happy (because, you’re more likely to follow through and do it). Just make sure you find a way to set aside decent chunks of money each month for investing.

WHAT IF…

Hopefully, I’ve done my part and convinced you to cut back a little (or, implement some other strategy) so that you can contribute towards an investment program of your choice. Taking it a step further, what if, after some time and dilligent effort you really took to this idea and came up with some creative ways to generate a side income so that you could save even more, what would the numbers look like then? The truth is, it is very easy to make a side income these days (small businesses and home businesses abound) and putting together even an extra $1,000 to invest each month is very realistic if you put your mind to it.

If you were to generate this extra $1000/month, what would the numbers look like then?

Starting Balance	$1,000
Annual Addition	$12,000
Years to Grow	25
Annual Interest Rate (ROI)	15%
Compounding Annually	1 time
FUTURE VALUE	$2,969,463

.

Hmmm, so you would be a little shy of $3 Million - this seems to just get better by the moment… Considering how easy it was to find an extra $500/month, this doesn’t seem like a bad deal after all (coming up with the extra $500/month in a side business).

In fact, if your business generated a $1000/month on its own and you put aside an additional $500/month from your own income, this is how the numbers would look:

Starting Balance	$1,000
Annual Addition	$18,000
Years to Grow	25
Annual Interest Rate (ROI)	15%
Compounding Annually	1 time
FUTURE VALUE	$4,437,734

.

$4.4 Million in 25 years - now, that is a lot of capital!

PASSIVE INCOME

Since the numbers are proving to be much bigger, you can probably appreciate them more. But, capital is capital, whether it is $1,500 saved each month to make those millions tomorrow or even $100 saved today. It all counts towards a grander, spectacular ending for yourself.

Here’s Why: by the time you reach the 26th year, you will finally stop putting money away and at the same time, you will have built up so much capital (as you just saw above), which will function as a base of cash (capital) to provide you with all the passive income you will ever need to sustain a very rich & wealthy lifestlye.

Now, keep in mind, the above results were achieved with only two wealth building tactics - saving into an investment account to take advantage of compounding and utilizing a small side business (multiple streams of income). There is still so much more you can do, to the point that the end result could very well be much, much more than this!

Lets say, however, you were able to work the $1500/month plan, and at the 25 year mark, you achieved a balance of $4.4 Million. What do you suppose you would get in income by the end of the 26th year - remember, your investment plan has been returning you 15% per year?

Assuming you stop adding in the extra $1500/month at end of the 25th year (i.e.: you retire by this point - which is the plan!), the amount of income you would realize at the end of year 26 and each year thereafter would be:

$665,660 (before taxes).

Converted to a monthly figure, that would be $55,471/month (before taxes).

Now, I don’t know about what works for you, but in 25 years from now, $55,471/month would make for a great monthly income (even if you factor in a 40% tax rate, lets say, such that the net amount is $33,283/month).

At the start of this article, I questioned whether credit card purchases made today are worth it in the long run… Now that you’ve seen the hard facts - pure figures that are very realistic - are you more inclined to put the plasma TV back on the shelf and save your dollars into an investment strategy instead? I sure hope so!

THE MAGIC

Here’s the best part… In actual dollars in cents, over the 25 year period (with our $1,500/month example), you will have put in only $450,000 in hard cash out of your own pocket and the remaining $3,987,734.40 will have been created purely from interest!

You can do the matth if you like - try it:

$1,500/month X 12 months X 25 years = $450,000.

As you can see, compound interest is truly, pure magic. It is the very reason why the rich get richer (and, also the reason why credit card companies make so much money off of your plasma TV purchases)!

Here’s to a great wealth building tactic - compound interest - and I sure do hope that you take advantage of it now, become time is really of the essence!

To your success,

EffJay