Time the best asset
As the year ends many young people will be leaving secondary and tertiary education.
For many it is a scary time, as they face a world where employment is uncertain, home prices are at record levels, and the ageing population means there may not be much in the way of welfare when they retire.
It’s natural to be concerned, but young people starting out have a unique asset on their side – they have time to develop the skills and build the asset base that will assist them to have a rich and fulfilling life.
And it’s not rocket science – it’s a matter of learning and using a few fundamental skills.
Want to be wealthy?
The first key to becoming wealthy is to understand that it’s not how much you earn that makes the difference – it’s how you manage it.
Thousands of people earn big money but are always broke because any money they earn slips through their fingers. This is why any wealth- building plan depends on grabbing hold of some of that money as it comes in. Don’t fall into the trap of saying: “If I had more money I’d manage it better”. Instead think: “The better I manage my money, the more of it I will have”.
Keep in mind that people seldom succeed or fail in one great earth- shattering event. Rather, it is the succession of small things done, or not done, that makes the difference.
Here’s a good example: Matt saves 10% of each pay and Stephen spends a little more than he gets each pay by booking up stuff on credit cards. That mightn’t sound like much, but after two years Matt has $5000 in the bank and Stephen is $5000 in debt. They are now $10,000 apart and they are both just 21! Who would you rather be?
Another critical factor to wealth- building is an understanding of how compound interest works. Whether you are investing money, or borrowing money, the two factors that have the most influence on the outcome are rate and time.
If a person invested $1000 a month for two years at 4 percent they would have $26,000 at the end of the period. If they could earn 8 percent per annum they would have $27,000 at the end of the two-year period. Because the term is short, the rate matters little.
However, if the term increased to 35 years the sums accumulated at the end of the period would be $900,000 and $2.5 million respectively. The combination of the higher rate and the longer period of investment made a difference of $1.6 million.
The same principles apply when you are borrowing money. Suppose two people borrowed $15,000 for a car and both took out a personal loan at 10%. If one paid it back over one year the interest would be just $750. But if the other did not understand compound interest and stretched it out to 5 years the interest would be $4200.
One of the best strategies is to make sure that the money you invest is the first item that comes out of your salary. If you try to save what is left you will invariably find there is nothing – by making savings and investment the priority, you are giving it the importance it deserves.
Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: firstname.lastname@example.org.