It’s time to tackle the intentions and take advantage of the blessings that can bring true prosperity to everyone. This is not one of these faster-wealth schemes and it’s not what most people believe makes them rich and carefree. Most people are looking for a “big hit”, a one-time stroke of luck and believe that everything is fine.
But let’s face reality. We will not make the road to wealth in any case. That’s the mistake millions of Americans make. We believe that as we make more effort, work smarter and longer, we will be able to realize our financial dreams. But our salary alone will not do that. In this article, I will talk about the best financial decision making strategies you can use to grow your future income.
What is the biggest mistake most of us make?
Malkiel (a well-known economist) did not hesitate a second when I asked him this question: The majority of investors do not take advantage of the unbelievable effect of compounding.
Compound interest is such an effective instrument that Albert Einstein once described it as the most important invention in human history.
But if compounding is such a great thing, I wondered, why do so few people realize their full potential? To illustrate the exponential effect of compounding, Malkiel told me the story of twins, William, and James, whose financial decision making strategies and investment strategies could not have been more different. Malkiel wrote this example in one of his books, so I knew it already, but hearing it live out of his mouth was an incredible experience.
The story assumes that William and James have just turned 65 and have reached the traditional retirement age. William was a bit ahead of his twin brother and had already opened a retirement account at the age of 20, to which he had paid $ 4,000 each year for the next 20 years. At age 40, he stopped making further deposits but allowed the money to grow by ten percent annually in a tax-free environment.
James did not start saving for retirement until he reached the age of 40, just as William stopped paying into his retirement account. Like his brother, James invested $ 4,000 in his future pension each year, earning the same ten percent return, and tax-free, but he paid into his account until he was 65, for a total of 25 years.
William, the early saver, had saved a total of $ 80,000 ($ 4,000 a year x 20 years to ten percent), while James, the late bloomer, had saved $ 100,000 ($ 4,000 a year x 25 years to ten percent).
Which of the two brothers had more at retirement age? The answer, of course, is the one who had started saving earlier.
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You are The Money Making Machine
Where do you go when you need the money? What type of ATM do you need for this transaction?
Here and now, I suppose that your primary “money-making machine” is yourself. You may have some investments, but you have not chosen them to give you an independent income. The moment you stop working, the machine stops, the cash flow stops and your income stops too. Essentially, your financial world stops turning. This is a zero-sum game and means that you just get out what you put into it.
Think of it this way. You are a kind of cash machine that you made this a poor compromise time-for-money. You are an anti-bank machine, an anti-time machine. That may sound like science fiction for many of you, but that’s the reality. If you have set up your life to give what is most valuable to you (time) in exchange for what you need most (money), and if you find yourself in that description, then believe me you’ve lost the deal. Has that become clear? When you stop working, the machine stops producing money.
Now let’s take you out of this equation and look for an alternative. We want to construct a money-multiplier machine that takes your place and set it up to produce money while you sleep. Think of it as a second business, with no employees, payrolls, or administrative costs. Its only “inventory” is the money you put into it. A lifelong income stream that never stops, even when it is 100 years old. Its mission to give you and your family or future family a life of financial success and freedom.
Take a look at the picture below to get a better idea of how it works. As you can see, the “machine” does not start to work until you make the most important financial decision of your life. Which decision? Deciding what percentage of your salary you want to save. How much do you want to pay yourself and set aside right from the beginning, before spending even a single penny on your daily expenses?. What percentage of your salary can you leave untouched, no matter what else happens in your life?
Saving is Most Important For Financial Freedom
I want you to seriously consider this financial decision making strategy because your remaining life is determined by this decision. You have to sacrifice a portion of your income today to always have money in the future. The goal is to enable you to get out of the nine-to-five hamster wheel and pave the way for financial freedom. And the beginning is made when you have made this simple decision and begin to exhaust the effect of compounding. The greatest thing is that you make that decision and nobody else!
In the end, it does not matter how much money you make. As you have seen, you can lose everything if you do not make any reserves. However, you will not confine yourself to putting the money undamaged under the mattress. You will be able to invest it in an environment that you feel is safe, and offers opportunities for growth. And if you follow the principles of the power of money, you will see how it grows until it reaches a point where it generates interest so high that you receive the income, that you need for your remaining life.
You may have heard that some financial advisors refer to this money as a nest egg. It’s a nest egg, but I call it your money-making machine. Because you feed them constantly and wait patiently, this sum will reach a critical mass and grow into a secure fortune parked in low-risk, tax-efficient cash so it will bring you enough money to cover your daily expenses and finance the sunny days of your later retirement.
No matter how big the sum you want to put aside, you have to stick to it in good and bad times. Why? Because the law of compounding punishes any missed savings.
Do not take the decision from the perspective of what you can afford to save, because this is a sure way to save too little or nothing. And do not put yourself in the position of interrupting your savings (or even attacking your savings) if your income runs short in a few months.
What Percentage Of Your Salary is Appropriate to Save?
10 percent, 15 percent, Or maybe 20 percent. There is no right answer. It only depends on you. What does your gut feeling tell you? And your heart?
If you need guidance on this point, stick to the advice of experts who advise you to pay at least 10 percent of your salary, with many agreeing that in today’s economy, 15 percent would be better, especially if you already are above 40 years.
Of course, you could say, “theoretically all this sounds nice, but I can not afford the money that much! Every penny is planned. “And that would not leave you alone. Most people believe that they can not afford to save. But honestly, most of all, we can not afford to save. We can all lose money if we need it for a real emergency! The problem is to raise money for our future because it somehow seems unreal. That’s why it’s so hard to save, even though we know that saving makes the difference between having a comfortable retirement in your own home and being at subsistence level with a smattering of government support.
How to Make Savings
Burton Malkiel told me in the course of our conversation, “The best way to save money is not to see the money.” That’s right. If you do not see the money in your checking account, you’ll be surprised at how many ways you can save to adjust your spending to your new balance.
By simply but continuously saving by deducting a small sum each month and putting something into your own money box first, you can capitalize on the effect of compounding your savings and multiply them in unimaginable ways.
It’s time to make the most important step for your financial freedom!
Most Important Step to Make Financial Decision of Your Life
You just have to decide what percentage of your income you will set aside for yourself and your family. It is the first and most important financial decision making strategy.
To repeat it again, this money is for you for your family and for your future. Do not mentally calculate how many purchases you need to make. Instead, focus on the returns you will achieve tomorrow. Instead of eating out with friends and spending $ 50, you’d rather order a round of pizza and beer and divide the cost among all. Exchange one nice way to spend the evening with another, save $ 40 each time, and play in the premier league of finance.
Do you think Forty dollars is not exactly a staggering sum? Well, that’s true, but if you do that every week and let that amount work for you, your retirement income will last much longer. A simple math problem: you not only save $ 40 per week, this small savings amount can bring you around $ 2,000 per year. And in terms of what you know by now, these $ 2,000 can help unlock the full potential of compounding, turning into big sums of money over time. How large? What do you say to $ 500,000? Yes, right: half a million dollars!
Do you realize how compounding works even with small, consistent amounts? And if you save more than $ 40 a week? Even $ 100 could make a difference of $ 1 million at the point where you need the money. Remember that you can not use the great effect of compounding until you commit to specific, regular savings. After all, you can not become an investor without having something to invest! That’s the basis: the foundation on which you build a fortune; the difference between a salary earner and an investor. And it all starts with you automatically removing a certain amount of your salary and investing in yourself and your family.
How much will it be? 10 percent? 12 percent? 15 percent? 20 percent? Determine the threshold amount and draw a circle around it. Underline it. Commit to it. Do it. It will help you to follow the simple steps below.
- If you receive a regular salary, arrange with Human Resources to transfer a percentage of your salary each month to your personal retirement account.
- If you already have a fixed payment facility for a company pension scheme, you can increase the previous amount by the newly chosen amount to which you have now committed.
- And what about working independently or freelancing? No problem. Simply set up an automatic transfer from your checking account to a private retirement account. And if you do not have a retirement account? Quite simply, stop reading, go online, and open a savings or retirement account with a bank or other financial institution. If you are not tech savvy, just go to the nearest bank branch.
Wonderful, you are back. You did it. Congratulation! You have just made the most important financial decision of your life – the first step to financial freedom. Now you are on the right track to make your dreams come true.