Episode 31: The Wealth On Any Income Book – Section 3: Create Your Prosperous Financial Future – Transcript
Hi Folks, Welcome to the Wealth On Any Income podcast. This is where we talk about money tips, techniques, attitudes, information and provide inspiration. I’m your host, Rennie Gabriel.
In the previous episodes I spoke about your five year financial goal; the difference between good debt and bad debt; how good debt can support you to create wealth. We discussed how to complete a Balance Sheet and determine your net worth so you know how close you are to Complete Financial Choice™. For the Income and Expense form, when you focus on expenses first you’re rewarded with more income. We discussed how to measure the level of pleasure based on where you spend your money. And in the last episode we spoke about how to handle emergency spending without creating a financial disaster.
Today, I will read the last of the 12 steps in the Wealth On Any Income book. This section is where I cover the tools, tips and techniques that will lead to you having Complete Financial Choice™ in your life. Today we’ll cover the financial terms you need to understand to create your prosperous financial future.
It will be around 20 minutes today.
As I read, I could stumble over some words. I am not a professional voice over actor so please forgive me if that happens.
The Wealth On Any Income book is designed to assist people to create the savings so they will have something to invest. Now that you are paying yourself first, you can create a prosperous financial future by putting the money you saved to work. How? That’s what’s next.
The following sections will show you how easy it is to begin investing by educating you on the very basics. I hope this is of interest to you and I present it in a way that makes it easy to understand and compelling enough for you to take action NOW. All of the other information in this book was to get you to this point. This is where, or how, financial freedom is created. It is not achieved just from spending less, getting out of debt, or making better purchasing decisions. Financial freedom is created by taking the money you saved and investing it to produce a stream of income so you no longer have to work, but you can still choose to work. This is where you have money working for you, instead of you working for money. If you find this section does not provide enough information, check out one of the many books available at your local bookstore, Amazon or library.
Most of the time when you save or invest your money, it will be earning at a compounded rate that I will explain later. You want to avoid simple interest earnings. This is an old and rare way of paying interest on borrowed money. I’m bringing this up just in case this is offered to you as a way of paying you for money you loan to someone, or deposit somewhere. It works like this: You deposit $100 in a bank which pays simple interest at the rate of 5% per year. At the end of the first year you would receive $5, and at the end of the second year, another $5, and so on. If you let all of the interest add up, at the end of 10 years your account would have a total of $150. This represents the $100 you deposited plus 10 years of $5 per year, $50
Compound interest pays on your deposit and on your interest each compounding period—which could be annually, monthly, or even daily. Using the same example as above, with $100 compounding annually at 5% it would look like this: At the end of the first year you would receive $5. At the end of year two you would receive $5.25, and by year 10 it would be $7.75. This is $2.25 more than a simple interest calculation. Do not underestimate this important concept because I’m using small numbers. The concept works the same with large numbers, too.
The account value at the end of ten years from compound interest would be $168.88 instead of $150. At the end of 30 years, $100 at simple interest would grow to $250. Compound would produce $432.19, which is 73% more money! Instead of using $100 as an example, let’s use $100,000. The difference would be $182,000 more from compound interest than from simple interest. This is based on a 30-year timeframe, at the same 5% interest rate.
The Magic of Compound Earnings
Let’s move on to the magic of compound earnings. Note: I used the word earnings instead of interest. I just explained compound interest in the previous section, and now I’m using the world earnings. Many people are not aware of the difference, so I’m going to review it. Interest refers to the income an individual, a bank, corporation or the government pays you when you loan them money. Interest is only one component of earnings.
Earnings represent two components: the interest or dividends which are paid, plus the growth in value of a stock, bond, real estate, or any investment. This is also called total return.
Many people are led astray by advertising that illustrates investment earnings from the past that are total return figures. You are already aware a bank or bond pays interest. People see a mutual fund advertise it earned 24% in a previous year and they think this means the fund paid investors 24% interest. This is just based on a lack of education. No one was paid 24% interest. Investors may have received a 2% dividend distribution and the balance represented a 22% increase in the value of their shares.
In addition to a lack of education, when I work with groups, whether it’s a class of forty people, or a presentation to 400, there are attitudes people express that concern me. It relates to a study I read about several years ago. People were asked, “What would you do with $5,000 received as a gift?” Many of them said they would pay off some debts or bills, buy a new car or entertainment center. The point is that they had plenty of places to spend the money.
When the question was asked, “What would you do with $50,000, assuming you had no tax obligations?” People answered more along the lines of spending a little bit, but putting most of into some savings or investments where it could grow in value.
The study showed most people would spend what they perceive to be a small amount of money, and only look to save or invest larger amounts. The fallacy is you can’t get to the larger amounts if you spend all the small amounts. You must also have respect for small amounts of money.
In my book you would see a chart that if you spend $5 today, you probably wouldn’t even miss it. That’s probably not enough money to buy a cup of coffee and a muffin at Starbucks. If you saved $5 per day, you probably wouldn’t miss that either. If you earned a 10% return on it, you’d have close to $114,000 in 20 years. Of that $114,000, only $36,000 represents the $5 per day. The $78,000 difference is all earnings. This is the magic of compound earnings. Money over time creates geometric growth. Start now, even if it’s with little bits of money.
Here is what $5 per day at 10% will do:
2 years $3,967
5 years $11, 616
10 years $30, 727
20 years $113,905
($5/day = $36,000) Earnings = $77, 905
30 years $339,073
($5/day = $54,000) Earnings = $285, 703
Some people tell me, “You can’t get 10% in the bank.” I didn’t say to put it in the bank. I said 10% earnings, not interest. Remember my description of interest versus earnings? If you don’t, just re-listen to what I said a few minutes ago. The following paragraph uses some numbers to illustrate the difference.
If you have a savings account that pays 5% annual interest on a $1,000 balance, you would receive $50 for the year. (Someday we may get back to these rates.) If you had a 5% government bond of $1,000 and interest rates dropped, the bond would become more valuable. Let’s say it increased in value by $100. If you held it for one year and sold it, you would have received $50 in interest and $100 in gain, for a total of $150. This means you earned 15% on your $1,000 investment (150 ÷ 1,000 = .15 = 15%). I want to make this clear, because you will not earn the level of return I’m using in my example by having money sit in the bank. You will need to make investments.
You could buy some real estate, stocks, bonds, or mutual funds, which I will be describing later on.
The Rule of 72 is a shorthand method to calculate how long it takes money to double based on the earnings percentage. If you divide 72 by an interest rate or earnings rate, you will find the years it will take for money to double in value. If you divide 72 by the numbers of years someone says it will take for the money to double, you will be able to calculate the earnings.
72 = Years for money to double
72 = Earnings rate needed/received
Yrs. to double
As an example, if I told you your money would double in 18 years and you divided that in 72, you would have a 4% earnings rate. If I said you would earn 12%, your money would double in 6 years. What’s this rule used for? Doing a quick calculation in your head or on paper when you don’t have a calculator handy.
You Can Become a Millionaire on $10 per day - Even with Debts!
The following is another perspective on the “pay yourself first” approach. It’s difficult for me to contain my excitement when I look at what’s possible with systematic long-term investing. You do not have to be a savvy investor to create a million-dollar portfolio. It can be done with as little as $10 per day, earning 12% over 30 years. There are mutual funds with track records of 20, 30 and 40 years long with returns in excess of 12% on an annual compounded rate. I am not going to go into sophisticated investment strategies, but I will show you how to invest in an easy way, a secure way, a way which will allow you to get better returns than the bank or government bonds, and be able to sleep at night. Obviously, nothing is guaranteed, but then there is no guarantee we will rise from bed tomorrow either.
Here’s an inspirational calculation: If you pay yourself first 10% of your current income and invest it at 12% earnings, compounding annually for 20 years, you will create enough invested assets which could pay out close to 100% of your current income, and not reduce the assets. In 30 years, you would produce a portfolio with enough invested assets to pay yourself 350% of your current income!
Let’s demonstrate this by way of an example: If you earned $3,000 per month, which is $36,000 per year, (I’m keeping things simple and not factoring in taxes) and paid yourself first 10%, which would be $300 per month, or $10 per day, and invested this and earned 12% per year, you would have an investment portfolio of $1,048,500 in 30 years. What’s $10 per day? It’s pocket change. It’s a couple of caffé lattes and a muffin from Starbucks. It’s less than a first-run movie ticket if you can get free parking. It’s dry cleaning three pairs of slacks. It’s money you don’t think is significant enough to invest. If you’re willing to invest pocket change, you can create financial freedom.
This million-dollar portfolio would be able to provide you with an income close to $126,000 per year. As long as you continued to earn 12% on your portfolio this $126,000 could be paid out year after year for as long as you lived. This is more than three times your annual income of $36,000. If you took out something less than what the portfolio was earning, it would continue to grow in size and could produce a larger income over time. Repeating; paying yourself 10% of your $3,000 per month income and investing it can produce passive investment earnings of $10,500 per month, or 350% of your $3,000 per month income. Over the 30 years, you would have invested $108,000 and produced $1,048,500. That’s almost 10 times what you put in! From an investment of $10 per day you could create an income of $350 per day. This is the power of investing over time at compound earnings. The stock market will rise, and it will fall, but over any 10 year period of time the direction of growth is up.
Thirty years is not a long time. I don’t know how old you are, but think about what you may have been doing ten, twenty, or thirty years ago and consider how fast it went by.
The next two concepts are revolutionary. Other financial planners or accountants may talk about the cost of waiting to invest, but I’ve not come across anyone speaking about what happens if you invest when you have debt.
From my previous comments I hope you understand you must start now to take advantage of earnings compounding over time. You might ask, “But what if I have debt? Shouldn’t I pay that off first?” The answer is NO! In my book you would see that clearly from another chart. What the chart illustrates is that if you waited as little as two years to pay off a $6000 debt before you begin investing, it hurts your investment return far more than any interest you would save. That two year delay to pay off a $6000 debt before you begin investing would reduce your portfolio by $229,000. This lost money could generate an additional income of $27,500 per year. This is enough money for a couple to leave the United States twice per year for the rest of their lives on a two-week European vacation and stay in “5 Star” hotels. I
What if the debt was never paid off, but interest payments were made, year in and year out? That would be $32,400 and it would still be less than the lost earnings from waiting to invest. After paying interest for 30 years you would still have $196,000 more than if you waited two years to pay off your debt first. How can this difference be so dramatic? This is because the earnings from your investment are compounding, but the interest on your loan is at simple interest. If you forgot about the difference, go back and review simple interest and compound earnings. The point is this: you must not wait to begin paying yourself first and investing.
The best part is this: I’ve not taken into consideration that as your income grows, you can make larger investment deposits. If you pay yourself 10% of $3,000 per month, you invest $300. If your income grows to $4,000 per month, the 10% is now $400 per month. Your income will grow over time, won’t it?
Please recognize I am not encouraging you to keep debt. The emphasis of my book is to support you in paying off your debt and having Complete Financial Choice™. What I am explaining to you is the value of beginning to invest now, regardless of your debt. If you never pay it off, but start investing now, you can create financial prosperity. In addition to the financial rewards, as I’ve said before, paying yourself first creates psychological advantages also, which can support you in paying off your debt more easily.
I hope you see the sense in starting to invest now—and you can start with as little as $100. Your next question might be, “How?” Whether $100 or $10,000, you would still start in the same place. Here are some suggestions on how to get started:
- Continue to educate yourself by taking classes at a local college or university extension program. Go to the library, bookstore or Amazon and get other books on investing where the book relates to your investment stage or experience. Read the business section of any major metropolitan newspaper or get the Wall Street Journal.
- Join an investment club. For information on investment clubs, you can find books in the library, bookstore, or Amazon. Or write to: National Association of Investors Corporation at P.O. Box 220, Royal Oak, MI 48068, and see the section on “How to Invest Without Paying Commissions” for more alternatives.
- Go to a financial planner. Many will only work with people who can invest lots of money. Many, however, especially those who are young or new in the business, will work with those who are just starting to invest. Many don’t even charge a fee, they work with you on the basis that you will buy the products (stocks, bonds, insurance) from them, and they will earn a commission from that. For help in choosing one, listen to my section about “How to Pick a Financial Planner.”
- Go to a full-service broker to help you, if there are any left after the financial market meltdown of 2008 when we lost Bear Stearns and Lehman Brothers. Full-service brokers charge the highest level of commissions and provide advice and research. Ask several people you trust, who are investing, to give you some recommendations or referrals. Again, listen to the section “How to Pick a Financial Planner.”
- Go to a discount broker, like TD Ameritrade, Scottrade, or E-Trade, or check websites like https://www.Acornes.com or Robin Hood. You can buy one share of stock at its current market price plus about $8 to cover the transaction costs. A discount broker does not provide research or advice. You could also go to Charles Schwab, which is half-way between a full-service broker and a discount broker. Again, refer to the section “How to Pick a Financial Planner.”
- Use a computer. If you don’t have access to the Internet, go to your library. There is a world of information available to you there, plus computers. One very popular site, motleyfool.com, has loads of information on how to get started and different simple strategies to use in selecting stocks. Also, listen for the upcoming sections “Dogs of the Dow” and “How to Invest Without Paying Commissions” for more information.
- If you’ve been unable to get the support or direction you need from your family, friends, co-workers or the recommendations I’ve made here, feel free to send an email to me at Rennie@WealthOnAnyIncome.com.
Here’s your opportunity to grow: This week open up your two accounts; one for the money that will create your Complete Financial Choice™ and the other to handle the sporadic, periodic or emergency expenses.
As a reminder, if you want all of the forms that were described in previous episodes please send an email to Rennie@WealthOnAnyIncome.com and put ALL FORMS in the subject line.
In the next episode we’ll cover more of the financial terms you need to understand to create a prosperous financial future.
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Until next week, be prosperous. Bye, bye for now.
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