Why starting today might be the best financial decision you can make.
We have all heard stories about people building overnight wealth, and the appeal is definitely strong. Unfortunately, getting rich quick doesn't always mean staying rich. In fact, 'easy come easy go' better describes what tends to happen. Lottery millionaires or celebrities have a harder time sustaining their wealth - they don’t know how to manage money, and the quick transition from rags to riches won't necessarily teach you that. The boxer Mike Tyson is said to have earned $400 mill during his career, but declared bankruptcy in 2003. Kim Basinger bought a $20mill property which she had to sell four years later as she declared bankruptcy.
So, what does ‘getting rich quick 'even mean? Fame, inheritance, winning the lottery, or betting your life savings on one dodgy crypto that skyrocketed - yes, these things do happen, but your chances are slim, and even if you succeed, chances are you won't enjoy financial abundance as long as you might like. So let's look at our options.
Building wealth through investing is a result of the factors of capital (how much money you put in), growth (how quickly it grows, or loses value), and time (how long you leave it for). Let’s address each one of these.
If you have tons of money, capital, to invest, you’re less dependent on growth. For example, if you invest £1,000,000, even two percent growth would result in a £20,000 gain. Unfortunately, most of us have to make do with several fewer zeros.
If you’re lucky enough to see strong growth, you’re not relying on investing much money, e.g. if you got the timing right with Bitcoin, you could easily have turned £100 to £30,000. However, this kind of growth is linked with very high risk and volatility.
Then we are left with time. If we have lots of time, we’re actually not relying on big sums to invest or high risk/growth - we can simply let time do the heavy lifting.
If we aim to get rich slowly, we utilise the best resource we have available - time. And utilising time is the easiest way to enjoy the full force of compound interest. Yes, this force is the secret weapon in wealth building - interest on interest, or more accurately growth on growth. You can read more about compound interest here.
So, how do we get rich slowly? The easiest way is to set up an automated deposit into your brokerage account every time you get paid.
Let’s say you start with £0, and invest £400/month. After 10 years, that might have grown to £82,000. How much will this have grown in 20 years, do you think? Double that? Wrong. Try triple - over £300,000. Getting to that million mark can be possible by investing £400/month over just 31 years!
If £400/month doesn't feel realistic for you right now, keep in mind that even £150/month could build up to a million, if you leave it to grow and compound for 40 years.
This is possible because of how the force of compounding gets stronger and stronger with time. Is it a coincidence that the most famous Warren Buffet biography is called The Snowball Effect? Absolutely not. And the best thing, the growth I’ve assumed in these examples are based on investing in low cost, low risk index funds.
Disclaimer: For this blog, I have used an assumption of 10% annual average growth. The index S&P500 has delivered an avg annual return on 11.88% between its inception in 1957 and end 2021. Not financial advice, do your own research.