When a lot of people think about what it takes to get wealthy, many conjure up images of a high income, or investing in a corporation like Microsoft. However there is a secret about getting wealthy that has been joked about by billionaires like Charlie Munger and Warren Buffett. These billionaires joke that the easiest way to get wealthy is to live a long life.
Time is the greatest asset an investor has at their disposal. It is the universe’s answer to alchemists looking to turn lead into gold when it works in concert with compound interest. As always examples help to illustrate this concept.
Let’s say we have two people who start investing at different points in their lives. Megan has parents who understand compound interest, and begin investing for their daughter when she is born. They invest $2,000 a year for ten years. Unfortunately an incident arises that stops them from contributing more after the ten year mark. How much money would Megan have due to the efforts of her parents investing on her behalf when she retires at 65? If you use the ordinary annuity formula for the first ten years, and assume a 10% annual rate of return, Megan will have accumulated $6,260,071 when she retires.
Jennifer on the other hand wasn’t fortunate enough to be born into the situation that Megan was. However, since her parents sent her to the best school they could Jennifer learns about compound interest when she is 20 years old. Armed with this knowledge, Jennifer gets an after-school job and invests $6,000 every year until she retires at 65. How much does Jennifer have if she also gets a 10% return? She would have about $4,313,429. Some of you will have noticed that Megan only had to contribute $20,000, while Jennifer had to invest $270,000 or more than 12 times as much, and she still has $2,000,000 less! The difference maker is time. Having a lot of time is the easiest way to get wealthy.
Many people out there say money is hard, it isn’t. It just requires a competency with math that people should get in the 7th grade. (It is very fair to point out that our public education system seems like a joke because a lot of people don’t seem to be learning this). To get millions in assets comes down to your head and to your commitment to a plan. Invest in your companies 401k to get your match, take advantage of Roth IRAs, and most importantly enjoy the journey. Don’t wait to get rich to enjoy your life. Twenty thousand dollars can turn into six million. In a country like the United States where a high school graduate is going to earn a little less than $800,000 over the course of their life, all they have to do is contribute 2.5% of their life time earnings early enough to investments, and they will retire a millionaire. The easiest way to get wealthy is to live a long time, but there are plenty of other avenues for you to take. What are you doing in your life today to set yourself up for this future?