August 4, 2017
I hope you’ve found some motivation after last week’s post. If you haven’t, well you’re in luck.
Today you’ll find out how to grow your wealth at a faster rate than a billionaire!
If that’s not motivating, I don’t know what is!
I know it sounds like click-bait. Either that, or I’ve lost my mind. But I promise you it’s real.
I learnt this concept on my own journey to financial independence, and I was very excited by it’s discovery!
Let’s use an example of a real-life billionaire, perhaps my favourite, Mr Warren Buffett.
No stranger to wealth, Warren Buffett has a net worth of around $75 Billion. He’s a very astute businessman and possibly the greatest investor the world has ever known.
He has made damn good use of compounding and long term sharemarket investing over his 80-odd years on this planet. But he’s run into a problem. His net worth is so large, it is supremely hard for it to keep growing at the same rate that it has.
I know, get the violins out! A high quality problem to have, that’s for sure!
This is where we come in…
Our regular-person example will be a saver called Sally. She has just decided she wants to build wealth, so she has a future full of freedom.
Sally has just started saving, so she currently has just $10,000 in the bank. She works a regular job and is sensibly putting money away every month.
So our billionaire starts with wealth of $75 Billion. Since he’s a super-investor, we will say he earns a return of 15%, on this net worth.
After a year, Buffett’s wealth grows like this: $75 Billion + 15% = $86.2 Billion.
Buffett earned over $11 Billion on his investments in this example. Not bad pocket money, I’m sure we’d all agree.
And in percentage terms, his net worth grew by a respectable 15%.
Sally had a starting net worth of $10,000. She also is saving $10,000 a year. We will assume she invests it and earns a 5% return.
In a simplified way, Sally’s wealth grows like this… $10,000 + 5% + $10,000 = $20,500.
She earned less than a thousand bucks from her savings over the year. But, her wealth has grown from $10,000 to $20,500. So, if we look at her net worth, it has grown by over 100%.
Because she is starting from a low base and also adding savings, her wealth is growing much faster than our billionaire, in percentage terms.
After a few years, Sally’s wealth won’t be growing as fast as in the beginning. And just like Buffett, as the numbers get bigger, the percentage growth will get smaller. Let’s look at it in action…
Here we are a few years on, and we will say Sally now has a net worth of $50,000. She is still working solidly and saving $10,000 per year. Her investments are still earning 5% a year. Let’s see her yearly picture now…
After a year, her numbers look like this: $50,000 + 5% + $10,000 = $62,500.
Her investments earned $2,500 this time. And her wealth has grown from $50,000 to $62,500. This means her net worth grew by 25% over the year.
It’s an excellent result! Sally’s wealth is still growing much faster than our billionaire, but it’s nowhere near her 100% increase in the first year.
Of course the key is, the more Sally can save, the faster her net worth will grow! There’s also a good chance she can earn more than 5% returns from her investments, which would give an even better result.
As time goes on, the numbers will get bigger and bigger due to the magic of compounding. But her wealth will increase by a smaller percentage because of the bigger numbers.
The trick here is, you need to measure your net worth. To do this, just calculate your assets minus your liabilities.
Your assets include investments, cash savings and your house. Your liabilities will be any debt you have. The figure you end up with, is your net worth.
It may be high, low, or even negative. It doesn’t matter. Just start tracking it. In a year, come back and calculate it again. See how much it’s grown and measure it in a percentage.
I came across this concept about half way into my journey to financial freedom.
Straight away, I was super excited at the idea that my wealth was growing at a faster rate, in percentage terms, than some of the richest people on the planet!
It’s extremely motivating to think about. Beginners especially, are often discouraged by how slow their wealth is growing and how small the numbers seem. I remember this feeling well.
By looking at it this way, it’s way more motivating and it’s a great way to measure the truly huge progress that you’re making.
Just the simple idea of someone doubling their wealth, by turning their $20k savings account into a $60k savings account, can be quite a powerful motivator to keep going.
They get to think to themselves “wow, I just tripled my net worth!”
Like a few of the lessons I’ve shared so far, this one is more of a mindset trick, than nitty-gritty financial strategy. There’s a good reason for that.
There are thousands of websites with savings tips, and saving itself is not that hard.
Where many people get stuck, is the mindset and implementing the strategies. So learning new concepts and tricks to keep your mind positive, focused, learning new ideas and ways of thinking, is the key to success.
For your own benefit, calculate your net worth right now. It will give you a great starting point for measuring your progress on your journey to early retirement.
Not only that, but you will see with your own eyes, how you’re able to grow your wealth, year after year, at a faster rate than a billionaire!