Here’s a great read from Huffington Post about personal finance which introduces various topics relevant to the second stage of personal financial planning, which is wealth accumulation. I’m not going to discuss all of the points, just the ones which I feel strongly about.
#10. I’d rather have Php 2.00 tomorrow than Php 1.00 today. Building wealth requires personal sacrifice and delaying gratification. While you’re still young and able, you have to start thinking about the future because time is one of your best allies in wealth accumulation. Look at this annuity table, with a monthly investment of P2,000, P3,000, and P5,000 based on a compounded eight percent annual return.
This tells you two things. You can start small, with just a monthly savings of Php2,000 but if you persistently invest it in a financial instrument that generates eight percent return annually, you will be a millionaire in twenty years! That million can be used to start your own business which would further add to your income stream. The second thing this table shows you is just how important time is to an investor. Even if you only invested Php2,000 for thirty years (equal to Php720,000), the return is much bigger compared to the future value of the Php5,000 monthly investment for twenty years (equal to Php 1.2 million). Of course, Php5,000 monthly investment for 30 years beats Php2,000. The point is, if you don’t have the financial capital, you have to make up for it with time and if even you had the money but had little time, the growth will be limited. It’s not hard to save Php2,000 monthly right? This is just the same as saving Php 67 every day, less than what a one piece Chickenjoy would cost.
If you do decide to start this habit, it’s going to be difficult at the beginning. Why? Because this takes time and constantly requires you to be disciplined and be focused on your goal. After all, it’s so easy to think of P2,000 as dispensable money, one you can always save up for month after month. No question about that. But the thing is, it’s not the money that we might run out of, it’s time.
#9. Millionaires typically don’t drive Lamborghinis and Aston Martin. This is the myth that the book The Millionaire Next Door has debunked. Despite billions in their bank accounts, some of the world’s richest are also the most frugal men alive. Warren Buffett continues to live in the same house he bought in 1958. Ikea’s founder Ingvar Kamprad flies coach not first class and drives a 1993 car model. If you want to be financially free, it’s important to keep whatever money you make. Don’t spend it on things that depreciate in value. Simplify your lifestyle by living below your means. Looking rich is different from being rich. If they can do it, why can’t we?
#8. It’s Okay to Splurge on Something Nice…at the Right Time. The key is balance. You can’t just live today like there’s no tomorrow when there actually is, and you also must not forego living in the present. This is one of the principles behind T. Harv Eker’s jar system of money management. You need to have play money to pamper and treat yourself. Don’t be too stingy on yourself because the time will come when you will feel too deprived, that it will push you to spend big time, which is what we’re trying to avoid. Splurge if you must, but it must be planned. Save up for it. Make it count. Don’t just buy impulsively.
#7. Forget Nuclear…Compound Interest is the Most Powerful Force in the Universe. Einstein once said that compound interest is the eighth wonder of the world. He was right. It is such as powerful force, which when combined with time, allows your investments grow at an exponential rate. So what is compounding? It is interest earning on interest.
Let’s go back to the example in the article: Which would you rather have: Php 1,000 every day for a month or Php 0.01 doubled every day for a month? This is the table we get. The first choice provides a constant return every day. This is wealth building by addition and what you would get if you were to put your money in assets that only give you simple interest and does not compound. With the second, you start with a measly one centavo but because it doubles, it increases sharply. This is wealth building by compounding, where interest is reinvested to produce higher earnings in the succeeding days, giving you an exponential growth. If you look at the table, you’ll notice that it was only on the twenty third day that compounding surpassed the linear growth from saving, but after that, it increased by leaps and bounds. That’s why we need time. Like a tree which takes years to grow and bear fruit, because it roots itself first to the ground, your wealth accumulates at a snail-like pace in the first few years, but once it reaches a certain point, it multiplies.
#1. It’s not about the money. It’s about freedom. This says it all. Why do we want to be financially free? To live the life we want! The definition of freedom is different for everybody. For some it might be living a life where they can buy anything, go anywhere, and do whatever they want. For some, it’s about being their own bosses and the ability to have more control over their lives. For some, it’s about giving back to those who have less. Because financial success and freedom is different for everyone, you have to define it for yourself. But before you can be free, you have to work hard first to have enough money which will work hard for you. To be financially free, you don’t need a lot of money or to be massively wealthy. You just need to accumulate enough assets that provide enough passive income to cover your living expenses.