Discusses the wealth building principles of compounding interest, leverage and property investment.
compounding,compound interest,gearing,leverage,property investment,investment
We would all like to think of ourselves enjoying the good things in life, not having to stress about finances, and not having to be concerned about growing old, poor.
But if we are currently living from pay cheque to pay cheque, never seeming to get ahead or having any savings, how do we change things? Where do we start in our quest for financial security?
The best thing we can do, is sit down, take a deep breath and contemplate the differences between the haves and the have nots, the achievers and the laymen. What is it that the successful and wealthy do, that is different to us? What are the principles that they utilise to create wealth?
Once we find out the principles that others who have created financial security have used, it seems that then the only step left would be for us to try and duplicate the process.
Following is a list of some of the wealth building principles that I have discovered in my study of and conversations with successful people.
These concepts have been utilised extensively by those who have already created enormous wealth.
1. Use the power of Compounding Interest/Growth.
John D. Rockerfeller once described compounding interest as the “Eighth Wonder of the World?
Compounding is also referred to as Rate & Time because the longer the time, and the higher the growth rate, the greater the effects of compounding become.
Compounding works by letting any interest earned get added to the initial investment, and then the next lot of interest is calculated on the sum of the two, and so on. Interest is earned on interest. This gives the effect of exponentially increasing the value of an investment.
One of easiest ways to calculate how compounding interest works with different rates of return is to become familiar with the Rule of 72. This rule states that “The number of years that it will take for your money to double is 72 divided by the interest (growth) rate?
Therefore if you have $1,000.00 invested at 10% interest, then the number of years that it will take for your money to double to $2000.00 is 7.2.
72 divided by 10 = 7.2
2. Use the tried and true method of investing in residential real estate.
Statistics show that over 98% of the world’s millionaires have made their money through property.
It should really not come as a surprise, because everyone needs a place to live, and generally at least one third of the population are renting. Property is a necessity, so it can never go out of fashion.
As the population increases, so does the need for housing. The laws of supply and demand therefore will ensure that prices keep rising.
Banks consider property to be one of the most secure investments and because of this they will loan you a high percentage of the value. This leads to the next principle.
3. Using Other Peoples Money or Gearing is a tool used extensively by the wealthy.
Why is using Other People’s Money so important? The reason is that it is possible to use “leverage? also known as “gearing?to obtain a greater result, than you could have obtained using only your own contributions. The word leverage comes from “lever? As you know a small amount of force applied on one end of a lever, can produce force far greater than what was initially exerted. A lever has the effect of multiplying the power exerted.
In the case of investing, it is referred to as leveraging when you use just a small portion of your own money, say 10% deposit on a $300,000.00 house, and borrow (leverage) the rest, in this case 90%. The capital growth that you benefit from is then calculated on the full $300,000.00, not just the $30,000.00 that you personally contributed, having the effect of multiplying your capital gain.
Gearing allows you to purchase a far more expensive property than you could if you were using only your own money. Controlling assets of a higher value means that compounding growth has more to work on, and therefore your net worth will increase much quicker. Gearing allows you to build an investment portfolio more quickly than would otherwise be possible.