This post is a ‘sneak peak’ at my 2011 book. Enjoy! Andrew
Jockeying with Bill Gates for the title of “World’s richest man” is a fellow named Warren Buffett.
He lives like a typical millionaire (he doesn’t spend much on material things) but he knows of a secret that I’m going to share with you: the secret of investing your money early.
Buffett bought his first stock when he was 11 years old, and the multi-billionaire jokes that he started too late. Starting early is the greatest gift you can give yourself. If you start early, and if you invest efficiently (in a manner that I’ll explain in the book) then you can build a fortune over time, spend only about 10 minutes a year on your investments (no, you don’t have to monitor your investments any more than that) and you can spend much of the money you earn from your job on the “finer” things in life.
Warren Buffett, however, chose to live modestly. He still lives in the same house he bought in 1957 for $31,500. And for Buffett—who’s often described as history’s greatest investor—he’s more interested in building his massive fortune so he can help the world by donating it to Bill Gates’ charitable foundation. Buffett and Gates are far more interested in spending their combined fortunes on Global Health, for example, than they are on the latest luxury items. Very cool.
But you can have a bit of both—enough money for a few luxurious goods today, and a small fortune that (if you’re so inclined) you could use to help the charitable foundations of tomorrow.
Again, it’s all about starting early—or what Buffett refers to sometimes as the “Noah Principle”, which allows for the magical work of compound interest (something I’ll explain later).
Most of us are aware of the Biblical story about Noah’s Ark. God told him to build an Ark, collect a variety of animals, and eventually, when the rains came, they’d sail off to a new beginning. Luckily, Noah started building that Ark right away. He didn’t procrastinate.
But let’s imagine Noah for a second. The guy probably had similar qualities to you and me, so even if God told him to keep the upcoming flood a secret, he might not have. After all, he was human too. So I can imagine him wandering down to the local watering hole and after having a couple of early Budweisers, whispering, “Hey, listen, God is saying that the rains are going to come, and that I’ll have to build an Ark and sail away once the land is flooded.” OK—some of them (maybe even most of them) might have figured that Noah had probably eaten some kind of naturally grown narcotic. A crazy story—they’d think.
Yet, somebody must have believed him. As crazy as Noah’s flood story might have sounded to his buddies, somebody had to have been inspired to build their own Ark—or at least a decent sized boat.
Despite the best of intentions, though, that person obviously never got around to it. Maybe he planned to build it when he acquired more money to pay for the materials. Maybe he wanted to be sure: to see that the clouds were getting dark. Or maybe he wanted to wait until it started raining. Pivotal moment.
Warren Buffett likes to say that Noah didn’t start building the Ark while it was raining. He started building it right away. And if you want to grow a fortune over time, you’ll want to follow this advice, because it’s far more powerful than you could ever imagine.
If you start investing early, you’ll leave many people behind in the financial race. Thankfully your friends won’t meet the same fate as Noah’s friends, but your ship will sail off into the distance while many of them will eventually scramble in the rain to assemble their own boats.
But starting early is more than just getting a head start. It’s about using magic. You can sail away slowly, and your friends can come after you with racing boats. But thanks to a force described by Albert Einstein as more powerful than splitting the atom, they aren’t likely to catch you.
In Shakespeare’s Hamlet, the protagonist says to his friend, “There are more things in heaven and earth, Horatio, Than are dreamt of in your philosophy”
Hamlet was referring to ghosts. Einstein was referring to the magic of compound interest. It benefits the early bird in a nearly supernatural way.
Breaking the magician’s code
Compound interest might sound like a complicated process, but it’s actually simple.
If $100 gains 10% interest in one year, then we know that it gained $10, turning $100 into $110.
During the second year, it would now be valued at $110, and if it increased 10%, it would gain $11, turning $110 into $121.
During the third year, it would now be valued at $121, and if it increased 10%, it would gain $12.10, turning $121 into $133.10.
It isn’t long before a snowball effect takes shape. Have a look at what $100 invested at 10% annually can do over the below time periods:
$100 at 10% compounding interest per year turns into—
- $161.05 after 5 years
- $259.37 after 10 years
- $417.72 after 15 years
- $672.74 after 20 years
- $1,744.94 after 30 years
- $4,525.92 after 40 years
- $11,739.08 after 50 years
- $78,974.69 after 70 years
- $204,840.02 after 80 years
- $1,378,061.23 after 100 years
Some of the lengthier time periods above might look dramatically unrealistic. But someone who starts investing at 19 (like I did) who lives until they’re 90 (which I hope to!) will have money compounding in the markets for 71 years. They’ll be spending some of it once they retire, but they’ll always want to keep some of their money compounding—in case they live to 100.
But you’re crazy to invest money if….
Before getting wrapped up in how much money you can save and invest, there’s one very important thing you need to clear up. Are you paying interest on credit cards? If you are, then it makes no financial sense to invest money. Most credit cards charge about 18% annually. Not paying them off in full at the end of the month means that someone else is compounding money at your expense, to the hungry tune of 18% a year. Money that you pay off on your credit card could be considered an “after tax” savings of 18%. Remember that if the banks are making 18% off you, but you cut their revenue stream off, then you are saving 18%.
Even if you’re paying a “low interest” credit card charging 12% annually, it’s still financially crazy to invest money if you’re keeping a balance on your credit card. After all, paying off the credit card debt is like making a tax free 12% gain on your money. And there’s no way that your investments can guarantee a gain like that after tax. You might make 12% annually after taxes, and you might not. But if any salesperson or advisor suggests that they can guarantee that you’ll make 12% annually, turn from them and walk away. I’ll talk about the empty promises many “advisors” make later, while discussing why they make those promises, and then trying to steer you clear of them in the future.
The inspirational realities of starting early
After paying off your high interest loans (whether they’re car loans or credit card loans) you’ll be ready to put Buffett’s Noah Principle to work. The earlier you start, the better, so if you’re 18 years old, start now. If you’re 50 years old, and you haven’t begun, there’s no better time than the present.
The money that doesn’t go towards expensive cars, jewellery, and credit card payments(because these are paid off) can compound dramatically in the stock market if you’re patient. And the longer your money is invested in the stock market, the lower the risks.
We know that the markets can move up and down a lot. It can even move sideways for many years. But over the past 80 years, the U.S. stock market has generated returns exceeding 9% annually. And this includes the crashes of 1929; 1973/74; 1987 and the crash of 2008/2009. For the past 200 years (as long as we have records) the stock market has proven that it can take a licking and keep on ticking—upwards and upwards and upwards.