Cast your mind back to when you were 25, earnings £250 a week, then on to 35 earning £500 a week. Maybe when you got to 45 you were earning £500 a day. Maybe not. But whatever it was, how much did you have left?
Probably about the same as now – not much. Because your expenses grew with your income. You needed that new car, better house, more clothes, holidays,..every rise in earnings came with a price tag. So that’s why lots of people with high earnings have no money. They aren’t rich – they just have high earnings. Which means that they have to earn at the level to stay still – stuck on the hamster wheel forever.
Let’s look at a couple, both working and earning well. Joint income of, let’s say, £90,000. If they were living off investments – 3% return? That’s capital of £3 million – invested, excluding the value of their house, which produces nothing. Hardly a lavish lifestyle, but to put £3m together needs a bit of luck and a following wind.
How to get rich then? Thanks to Bill Bonner and the Daily Reckoning (www.morefrombill.com) – he has the concept of financial escape velocity. This describes what has to happen to build up serious money. You might get lucky – you may live just where a developer needs to build and you get a ransom price or you might get some other lucky break, but it’s unlikely.
Or you might use compound interest. Sorry – it’s not an easy or quick solution, but it does work. Make a small investment, add to it, and keep doing it. Whatever it earns you reinvest in it. Compounding does the rest, over time. Later you may notice that your wealth has increased more than you thought – more than your expenses. Compounding is the first little trick.
Here’s the second. Don’t tell your family! Not because you don’t want to share it because you don’t trust them. Don’t tell them because you do trust them – to spend it. Don’t let a rise in your earnings attract a rise in their spending.
Compounding works in business too. I’m a firm believer in companies paying corporation tax. Not too much though! For two reasons – one is that then there will be some after tax reserves left in the company for the bad times, which stops the company going out of business, and secondly (you guessed) because of the benefits of compounding. If you take all the company’s earnings out, the company is at risk, and it won’t grow so fast. Let it grow and one day, you will find you’ve got to the point where your earnings are growing faster than your spending. Just don’t tell anybody.
Don’t worry about me knowing – I will already know, because that’s what we do!