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Creating Freedom Through Financial Independence

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Grow Your Wealth Faster Than A Billionaire

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!

 

Buffett’s Big Bank

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…

 

Saver Sally

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.

 

Billionaire Wealth After Year 1

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%.

 

Saver Sally After Year 1

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…

 

Sally’s Future Wealth

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.

 

Measure to Motivate

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.

 

Starting Out

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!”

 

Final Thoughts

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!

12 Comments

12 Replies to “Grow Your Wealth Faster Than A Billionaire”

    1. Cheers mate!

      I did see that article… and the previous one where Il Falco was stirring the pot lol. The results are pretty impressive, who knows what the next 20 years look like though. At a minimum there will be plenty of reliable income, coming our way 🙂

      Franking credits in retirement are like an income rocket booster!

      1. He he, yes Il Falco picking on the elderly again. No respect:-). I reckon he’ll be a grump old man when he gets to my age. Even grumpier than me:-). Our regular investing email discussions are very enjoyable.

        Given that I’m receiving a tax free SMSF pension I get the full benefit of the franking credits from our SMSF LIC holdings. So in my case the LICs ofter much greater performance compared to BRK. Beside BRK.B is of no interest to me given we would have to realise capital for income and currency fluctuations would cause havoc as well.

        When it comes to income investing boring is good.

        1. Yes boring is beautiful!

          Hahah yes he may well be… he hasn’t run out of grenades yet 🙂
          Berkshire will likely end up being a great dividend stock one day too.

          I wouldn’t feel comfortable either having to sell to create income.
          Given that we’re retired now, our dividends will likely be very low/no tax for quite a while, which is nice 🙂

  1. This has to be one of the most moronic things I’ve ever read. Please stop trying to give people advice about things you so clearly don’t understand.

    1. Haha thanks for stopping by Steveo! I decided to publish your comment even though it wasn’t very nice 😉
      A very serious comment for a pretty light-hearted article. I think it’s just encouraging for beginners to think about.
      The Law of Large Numbers means it’s much easier to grow your net worth in percentage terms from a low starting point… I clearly must have those facts wrong 🙂

      You’re clearly too intelligent for this blog so you’re much better off going elsewhere

      1. I agree, SMA. I see this article less as advice, and more as motivation. If it doesn’t work for someone, that’s cool. You aren’t forcing people to get out their calculators… ????

        1. Absolutely. It’s just an observation I had which I thought may encourage someone. Thanks for your support Mrs ETT!

  2. Nice way to psychologically focus and keep motivated. Personally I’ve always advocated that the best comparison/benchmark is your own past self. As long as you’re beating your past YOY, you’ve gotta be doing something right!

    Mrs DDU

    1. Very true! I noticed you guys do a lot of YOY comparisons. Great way of doing it.

      It’s definitley ‘healthier’ to be only comparing against yourself. Track your own progress and do it your own way 🙂

      Thanks Mrs DDU

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