Retire a Millionaire?
Did you know the average household income in the United States right now is just over $52k per year? Did you also know that if you earned $52k every year over the next 30 years, invested 15% of your income, and never once received a raise, you could also retire wealthy?
The reason why has to do with compound interest. The way compound interest works seems complicated, but it’s really not at all. Here’s a quick example:
We are going to use a 10% annual return for easy math here. Therefore, let’s say you invested $1,000 last year into a mutual fund. At the end of the year, you would have the $1,200 you invested plus an additional $100 from the 10% annual return, for a total of $1,100.
Assuming the same 10% return is the same the following year, then you would earn 10% on the $1,100 inside the account, plus another 10% on the amount you invested in year two. In two years time, you invested $2,000, but your account value is $2,210.
You are getting the interest on the money you invested AND the interest from the previous years. This is called compounding interest, and Albert Einstein actually called this the 8th wonder of the world.
The key part to compounding interest and building wealth revolves around one main point: Time. The more time you have to invest, it becomes exponentially easier to build wealth. This is why it is so important to budget, live on less than you make, pay off your debt, and allocate your income to things that build wealth over time versus build wealth for somebody else over time.
One last shocking fact: We can’t predict the future, but we can go off how the past has performed to make an educated assessment on the amount of wealth we will build up over time. From looking at the past, we would be able to assume a 8% – 10% rate of return simply based on how the markets have performed in our history.
What we couldn’t predict is a 28% rate of return. Although we may see it once or twice in a 30 year period, we can’t assume this high of a return each and every year. However, do you know you does get a 28% rate of return every single year?
Your credit card company.
There is a reason why every tall building, sports arena, and coliseum has a bank’s logo at the very top. We are investing for them.
The first step to solving your problems with money is to take back control of your money. This always starts with the Budget.
Thanks for listening in on another episode of the Money Peach Podcast.
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