Tuesday, February 5, 2008
WHAT IS WEALTH BUILDING? - Turning $10 000 into $2,000,000 - Making Money Work For You!
Wealth building is a large part of creating financial independence in the future. It can be sometime mis understood by a lot of people, yet something very essential.
The first thing that we will clarify is the difference between real income and wealth. A lot of people confuse the two. Most people believe that if you are earning high income in a well paying job that you are rich, you've made it and you are going to live happily ever after. However this is not true because at the end of the day once they stop working they have nothing left to sustain their lifestyle. Yes they may have the BMW's, the multi million dollar houses but at the end of the day if they aren't investing their money, when they stop working they will have very little left.
Wealth on the other hand is all about creating assets, which give you capital growth and passive income. The power of compounding is very important here. The example below will illustrate this.
Example: Person A chooses to put aside $10 000 each year for and enjoy the benefits of it in 40 years time. At year 4 their money is at $40 000, year 14 $140 000 and by year 24 $240 000. At the end of the 40 years he would have only accumulated $400 000!!
Example: Person B invests $10 000 at 15% for 40 years. This is a once off investment and he doesn't take any of the money out. Now at year 4 their money has grown to $17,490.06. By year 14 it has grown to $70,757.06 and by year 24 it has grown to $286,251.76!! As you can begin to see the growth is exponential. Do you want to know how much his money is worth by year 40? Well ill tell you. At the end of 40 years after initially putting in $10 000 dollars and not adding a single cent to it, his money is now worth $2,678,635.46!! Who would jump at the idea that if they had 40 years and $10 000 that they could be a millionaire?!
Know can you imagine that scenario with a bigger initial deposit or more time? If person B continued for another 5 years that amount would have grown to $5,387,692.69!! Who wants to make $2,709,057 in 5 years sitting on their butt all day? Because thats essentially what you just did!
So one the keys to compounding is to get started and get started now! Because you get your money to work for you and not the other way around!
Now compounding with real estate also works very effectively. Essentially the key is to continually re-invest your earnings and from that duplicate the process.
The best way to start is to buy an investment property, watch it grow in value and then access your increased equity - you then use that to purchase another investment property. If you keep buying wisely, structure your finances right, you can then duplicate this process again and again.
The beauty of duplication is compound growth. Invest the capital growth on one property - and start getting capital growth on two properties. Use the growth on two properties to buy two more. And so on... The growth is exponential.
So just to recap quickly. The difference between income and wealth is that wealth is about investing your money, making it work for you and accumulating assets that can provide for you in the future. Income is a nice car, a nice apartment and a nice pension from the government of about $300 a fortnight when you can no longer afford to work. Which one would you choose?
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