## “How to Become a Millionaire Simply, Successfully, and on Your Own” By Karl EggertsenThe path to financial independence is based on a number of proven principles that are quite simple and straightforward. They do not take alot of time or sacrifice. I have personally found that success using these principles is very achievable by most anyone with sufficient motivation and discipline. However, many people lack the basic awareness or knowledge about these principles to make use of them. This article discusses two of the most basic and important principles, or “great truths”, about investing. Please feel free to send it on to friends and family. I will be covering all the principles in a book I am presently writing that will become available in the near future. ## IntroductionIt is believed by many people that you need a lot of money before you can start to invest successfully. This is a fallacy. Discount brokerages and low minimum cost investments available today enable an investor to start with very small amounts. The fact is, a new investor starting out with no more than $1000 can have a much better chance of achieving his or her financial goals—even becoming a millionaire-- than someone beginning with many times this amount. You might ask why this is possible. Bottom line: It is not how much money you make, it is what you do with it and when. What is most important is how early in life you begin investing and how you invest—not how much money you start with. Table 1 illustrates how a beginning investor starting early with small amounts of money can surpass an investor with much more money who starts planning and investing much later. George, age 25, invests $1,000 initially at a 10% growth rate for 40 years to age 65 and retirement. Bob, age 55, invests $100,000 initially at 10% growth rate for 10 years for his planned retirement at age 65.Results are shown for both investors using two cases: (1) assuming $100 added every month, and (2) $300 added every month. This example demonstrates the miraculous power of compounded growth over longer periods. Despite Bob’s tripling his monthly contribution to $300, there is not near the change in the ending value at 10 years as there is for George who nearly triples his ending value at 40 years! The reality is Bob would need to contribute over $8,000 per month for 10 years to achieve what George did with only $300 per month by starting much earlier!
It is clear you do not need a lot of money to invest when you take advantage of time and compounding. Good planning, regular investing, time (which is obviously a very critical factor), and compounding can make it possible for anyone with discipline and patience to achieve their financial dreams. People with modest incomes can become millionaires. Two of the major principles of successful investing are: (1) Disciplined savings and investing (2) Time and compounding The key starting point for the beginning investor is to set up a regular program of disciplined savings and investing. Once in place, time and the miracle of compounding can then work their magic. Important details of these two principles follow below.
Many people are aware of the need to set up an investment program to reach their financial goals. But you need to start accumulating some savings before you can start investing. Unfortunately, too many people never take this first critical step. Establishing a disciplined approach to saving is critical. Proven solution: Forced savings. A most effective way to set up a disciplined regular savings and investment plan is to automate it! Forced savings and dollar cost averaging—another very important feature of a disciplined savings and investment program, are discussed below. • Forced savings effectively causes a small portion (determined by you) of your paycheck to be automatically withdrawn before you receive it, and deposited into your investment account. This process--which you can set up with your employer and investment broker--can continue indefinitely with minimum effort on your part. It can grow your nest egg very quickly.
To make this work, it is critical to stay invested at all times, continue to save and buy more investment shares month aftermonth, and never, ever spend any of your invested savings along the way. History shows, the longer you are invested, the better.
A disciplined savings and investment plan over time enables the power of compounded growth. Regardless of where you put your money—cash, stocks, bonds, real estate, or a combination—the key is to make your money work for you. It does this through compounding. Compounding is what can make even small investments grow at an exponential rate to amazingly large values over time. Compounding basically works like this. Money you put into a savings account earns interest. Then you earn interest on the money you originally put in, plus on the interest you have accumulated. As the size of your savings account grows, you earn interest on a bigger and bigger pool of money. This basic phenomenon works the same for stocks, bonds, real estate, and other types of investments. When an investment grows over time, the amount by which it grows is also growing! The magnitude of compounded growth ultimately depends on several factors: • The amount of money invested • How regularly money is invested • How much time is spent growing • The underlying growth rate of the investment The first three items are fully controllable by you. The fourth item, the underlying growth rate, is dependent on your specific investment(s). Though the ups and downs of an investment are generally unpredictable as to their occurrence and duration, you can best “manage” the investments growth rate by staying invested at all times to be sure to capture all positive growth periods. History shows, the longer you are invested, the better. For example, the S&P 500 stock index has an average annualized return historically of around 10%. However, on a shorter term basis, it varied unpredictably around this average. To capture that 10% growth rate with the highest probability—you would have needed to stay invested at all times. Note: Different investment types and classes have different return rates historically. The following tables provide examples and important insights to the amazing power of compounded growth. Table 2 shows the growth of a one time investment of $1,000 (without any further money added) at various growth rates over time. Note the huge effect of growth rate. For example, at the 4% growth rate, $1,000 grew to $4,940—about five times the original value. Using the 10% growth rate, $1,000 grew to $53,701, almost 54 times the original value! Also, note that most of the growth in value occurs in the later years. Thus the importance of keeping your money invested and working for long time periods.
Growth Rate
Table 3 shows the growth of an initial investment of $1,000 and a modest $100 added monthly. Note the difference in compounding between Tables 2 and 3 at the 10% growth rate. The results of adding just $100 per month is truly amazing. In Table 2, $53,701 results at 40 years without the regular $100 deposits; in Table 3, $686,109 results at 40 years with the $100 deposits! Again, note the huge exponential growth in value that occurs in the later decades.
Growth Rate
Table 4 shows the growth of an initial investment of $1,000 but with
a larger deposit of $300 added monthly this time. Comparing the effects
of increasing monthly deposits to $300, note the very large increase
in the compounded growth values resulting for all growth rates. In Table
3, at the 10% growth rate, $686,000 results
## Summary - Ten things we have learned:1. You do not need large sums of money to start investing 2. Small, systematic investments can amass a fortune 3. Disciplined savings and investment is the key starting point 4. Time and compounding are two of your greatest investment assets 5. The path to wealth is basic, simple, and very achievable 6. Discipline and patience matters most 7. It does not require great sacrifice 8. You can turn an initial $1,000 investment into $1 million or more 9. Plan, save, invest, and compound are the keys 10. It is all up to you. Start now. |