Sunday, March 16, 2008

Turn $1 Into $50

Imagine how wealthy you could be if there were a way to turn every $1 bill into a $50 bill. Well, you need not leave it to imagination - not only is it possible, it is relatively simple to do.

First, consider the power of compound interest. Generally speaking, if you invest money and earn a moderate 10% APR, you double your money in seven years. Think about that - if a person age 18 were to invest a dollar at an annual average return of 10%, that dollar would be more than $50 by the time he reaches age 65.

I can hear you groaning already. "Sure, it only takes 47 years!"

But that is not the point. The point is much more powerful than that. You see, the average 18 year old today wastes an average of $4200 each year on meaningless, unimportant "stuff". Now figure what that person would have at age 65 if he had invested that $4200. He would have a whopping $210,000.

Now let's further assume he invests another $4200 at age 19, at age 20, at age 21 and again at age 22. Even if he never saved another dime, he would have well over a million dollars at age 65.

And if that person continues to invest even half that much each year throughout his working life, at age 65 he would be worth many millions.

So, here is the point: a dollar saved is worth many dollars spent. The older you are, the less it will grow - but it will grow.

To illustrate - at age 24 you buy a snowmobile for $5000. In a few years, it is worn out, and had cost an additional $1500 in fees, registrations, insurance, fuel and maintenance. And now you need a new one. You are out $6500 now, and you are also out all the dollars that it would have been worth had you invested it until retirement - $208,000! So, that few years of owning that machine has really cost you nearly a quarter of a million dollars - a very expensive machine, indeed. Especially since it has limited use during snowy winters.

Of course, we cannot go without fun. So what if you invest that $5000 at age 24, until age 31. It would be worth $10,000. You could then buy the snowmobile and still have $5000 invested that will be worth about $100,000 at retirement. The best of both worlds. Or, buy a used machine and invest the difference.

What I am advocating is really quite simple: waste less, and invest more. Wait longer to buy the big ticket items. Sacrifice a little now, so you don't have to sacrifice anything later. If you give up eating pizzas for awhile, you can eventually afford to buy the pizzaria and have all the pizza you want.

And, of course, the earlier you begin, the wealthier you will become.

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