Why is it that only a very small minority of people in every country or society ever get to the top on matters money and wealth?
Generation after generation, money remains in the hands of a very small clique of men or women or families.
Yet, millions of people in each society dream of money and wealth, only to come to the tail end of their lives with nothing or at best average Joes.
While their are a number of factors that determine whether you’ll end up poor, average or join the exclusive club of wealthy people, in this article I shall focus on only one: Compounding.
So what is compounding?
1. In simple terms, compounding is what we call ‘Money working for you’ not you working for money! This is when you invest your money into financial, real estate or other assets that earn you money without you doing anything.
2. Re-invest the money earned by your assets back into the same asset classes or buy other assets that earn you further money into the future -here I give the analogy of a family. Assume your initial investment is the parent, compounding means you do not eat the children of your money, their grandchildren or even the great grandchildren. Instead, use them to buy other similar assets or other classes of assets that continue to give birth to more children. Think of your family tree!
3. Start with Savings – this is the most difficult handle for most people. They never get started either because they think the amount they can save is too small or they’ll wait for too long. Savings is the starting point if you want to profit from the power of compounding – the money is not in the savings per se, the real deal is in the children your savings will give birth to, if you re-invest them diligently and consistently over a very long time! This is the devil you MUST overcome first to get into the joys of compounding.
4. Patience and persistence – majority of the people loose out on the joys of long term success for lack of patience or the know-it all attitude. Compounding is a game of time – it always wins in the long-term.
5. Lies on effects of inflation – compounding beats inflation hands down. While it is true a shilling in hand today is worth more than the same shilling tomorrow – the children of your money are re-invested based on tomorrow’s shilling-worth, not yesterday’s shilling-worth! Thus, your investment keep growing under the prevailing market returns.
6. Miracle of habits – the reason you must start today is because resilience is build through repetition that eventually turns into a habit. Within a short time of persistence and perseverance to save and invest, your mind soon automates this behavior into a habit! Once it becomes an habit, it becomes so natural, just like is driving, cycling or responding to calls of nature is automated into your daily life!