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Lindahl Kinney
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By the time the average student graduates from high school, hell have invested around 15,000 hours in learning about a broad variety of subjects, which are considered necessary in order to be successful in life.
Many go on to college where they will spend another 2,000 or so hours examining a specific subject in preparation for a rewarding profession.
If we were to stop each graduate as they stepped off the stage and ask them the question, "Whats your biggest goal in life?" chances are the most popular reply would be, "To earn a lot of cash."
Although this kind of wet behind the ears reply may lack the seasoning of maturity, its tough to overlook the reality that - intentionally or not - schools simply fail to teach financial literacy.
What about the economics classes? Nope, the majority of what you generally get is just a bunch of academic mumbo jumbo that is entirely worthless to all but a handful of policy makers.
Is it any wonder why the great bulk of us do not comprehend the basic principles of money and riches?
Why are so many people are living pay check to paycheck? Why has consumer debt spiraled out of control? Why are not you happy with your own financial situation?
Well, the answer goes more serious than only an economic decline or the transition from The Industrial Age to The Information Age.
While lots of people are currently facing tough financial situation, there are also those people who have become even richer during these uncertain times.
These individuals are not any smarter than anyone else, but they do comprehend something that most everyone else doesnt: the difference between earning money and creating wealth.
They understand and use the subsequent three wealth-building concepts that are not taught in school, but should be:
Wealth-Building Theory #1: Leverage
Leverage is having the ability to do a lot with a little. Within the context of creating wealth, it means leveraging financial resources to get better than average results.
Really understanding how this concept works is the thing that distinguishes the poor and middle class from the affluent.
If you are currently trading your time for someone elses dollars at a job, you can only exchange about 14 to 15 hours a day. And since zmg construction , youre actually selling your life to someone else.
One of the most popular methods to leverage your time is to be a company owner and multiply your efforts and profits by having other people work for you.
The other strategy to leverage your time would be to be an investor or rich zahn - someone who uses money as leverage. Most financial institutions and companies have been using O.P.M. (other peoples money) for centuries.
Consider it:
-- Your bank and charge card companies make cash with your cash
-- Your insurance provider makes money by means of your money
-- And your mortgage company makes money with your money
The great news is, you also have the same chance to make money just like these guys do when you implement these wealth-building theories in your life.
Wealth-Building Theory #2: The Rule of 72
You may already know the method by which The Rule of 72 works, but what Ive found is that a lot of people who have heard of it don rich zahn remember what it says (which means they probably arent employing it), or a larger section of the citizenry has vaguely heard of it, but they do not have a hint about what its.
The Rule of 72 is a very crucial financial concept that says that whenever you take the number 72 and divide that by the interest you are getting in your investment, the answer to that equation will tell you how much time it takes for your money to double.
For example, if your cash earns 6% per year in a mutual fund and you have $10,000 in that account, itll take you 12 years to double that money (72 divided by 6% per year = 12 years).
Im sure youd agree, thats a really long time to wait. Nevertheless, time is not the only thing you need to compete with because you must also find a method to combat the quiet riches killer of inflation.
As stated by the Bureau of Labor Statistics, the typical yearly inflation rate over the previous 20 years has been 3.24%. In other words, you need to be earning at least 3.24% per year on your investments merely to keep up with inflation.
If you are starting out in your early 20s, then youve got time on your own side, and by using the next wealth-building theory I am going to cover, you can nevertheless grow a sizable nest egg even with smaller yearly returns.
However, as a rule of thumb, long term investing works best when you either have a lot of money or youve got a lot of time. If youre lacking in either one or these two regions, you need other investment vehicles which are more aggressive to help you accomplish exactly the same end effect.
That surely doesnt mean that you should allocate all or a large part of your available investment capital into higher-yielding investments, but you do want vehicles that permit you to employ The Rule of 72 harshly in order to get higher returns.
Wealth-Building Theory #3: The Magic of Compounding
Albert Einstein once said "The most effective force in the universe is compound interest", yet very few people truly understand or completely grasp what it means.
So here are a handful of scenarios showing how simple vs. compound interest plays outside long term:
Riches Strategy #1: Your great grandfather invested $100 in 30-day T-bills (or the equivalent) on December 31, 1925, and always rolled over all proceeds into 30-day T-bills. 78 years later, that $100 would be worth $1700.56 - big whoop, right?
Wealth Strategy #2: Your great grandmother invested $100 in big stocks (the S&P 500 portfolio) on December 31, 1925, and reinvested all dividends in that portfolio. 78 years after that $100 would be worth $199,200.80 - BIG difference.
This example illustrates the amazing power of compounding. The "safe" rate of return in T Bills pales in comparison to the second case where the profits were compounded over exactly the same amount of years.
All of these financial concepts are vital to your success. Attempting to develop wealth without them is like driving a car with worn out parts. The car might still run and finally get you to where you need to go, but it will not be as quick and efficient as it could be.
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