Everybody would like to be rich.
In fact, I think we all have searched once in our life for the perfect plan to become rich really fast. Unfortunately, most of us have not found the one thing that could make us insanely rich in a matter of days….
And, except if you’re lucky enough to win lottery and unless you are willing to do immoral or illegal activities which is certainly not my case, I think that this ultimate plan does not really exist.
Becoming rich fast is a myth that medias like to talk about once and then to make you dream and sell more newspapers or get a better audience!
But, there is a simple recipe that can make you retire millionaire. Yet, you’ll seldom hear about it. School won’t teach it to you. TV won’t show you and your parents probably don’t know about it.
My goal is to retire at or before 45 years old from the rat race. Here’s how!
Many people earning an average Joe income have been able to retire millionaire.
How is that possible?
Well, time plays a big role in that strategy since it’s based on the compounding interest effect.
Did you know that Einstein has said that compounding interest is the strongest force in the universe?
Let’s do some basic maths to show you the pure magic of compounded interests.
Take 10,000$ now and invest it at 8% (which is reasonably attainable in the stock market) per year compounded interest. This means that after one year you’ll reinvest your initial 10,000$ plus the 800$ received in interests.
After 5 years, you’d have 14,693$. Okay, you won’t retire over that amount of money. But hey, it’s like a snowball rolling down the hill. At first, it won’t look impressive but let it roll.
After 10 years, you’d have 21,589$.
After 20 years, you’d have 46,609$. Not bad but still not that impressive huh? But look at what is going to happen after 20 years. Now you have reached the threshold at which compounded interest starts delivering crazy magic.
After 30 years, you’d have 100,626$.
After 40 years, 217,245$.
After 50 years, 469,016$.
After 60 years, 1,012,570$.
After 70 years 2,186,164$.
Okay, I’ll stop there because unless you are a vampire chances are you won’t care up to this point.
Not bad huh?! Remember that the only thing we did here is invest an initial 10,000$ at 8% and reinvest the interests. Now, imagine that you would have added 5000$ per year to you freedom fund. Would you like to see the results? After 30 years you’d have 667,042$! Now we’re talking!
Save on every paycheck
Now that you understood the concept, in order to reach your goal you’ll have to change your life a little.
Like you probably understood, the more time you have, the better it is. Time is really the most important ingredient in the equation. But, the second most important ingredient is how much you save!
Some folks on the web like Jacob Lund Fisker saved up to 85% of their net income for years in order to harness the true power of compounded interest and enjoy early retirement. Jason Fieber from www.dividendmantra.com has managed to save +/-50% of his net income over the last 4 years to reach his goal of retiring at or before 40 years old.
I try to save at least 10-20% of my income. The rest is mostly dedicated to paying my mortgage and personal debts.
The best thing to do is to pay you first. As soon as you receive your paycheck, make sure the first thing you do is save part of it. Then pay your bills, then spend the rest.
Most people pay bills, spend the rest (if there is something left) and then complain it is impossible to save.
Trust me. If you consider yourself as your most important creditor and pay you first, you’ll realize that you will find ways to pay your other bills and spend the rest.
If your income is not high enough then you’ll have to cut spending and/or increase your salary!
Spend less than you earn
For most people, over spending is a problem in our current society.
If you earn 2000$ per month and spend 3000$ per month, it won’t be long before you go bankrupt.
Now if you earn 2000$ per month and spend 1500$ then you still have 500$ to invest in buying back your freedom.
Spending habits is really an acquired behavior. There is a social pressure in our society to constantly pay for things. It seems that if it’s free then it probably doesn’t worth it.
Medias and publicity have done a great job at washing our brains to make us believe fallacies. Nowadays, saving means spending less than the price asked by the seller. It is not putting cash aside in a jar or a bank account anymore!
Words have been perverted to give them new meanings.
There are movements or anti-consumerism starting everywhere. People start to understand that consuming too much is not the solution. It doesn’t make people happier, it pollutes our planet and destroys ecosystems.
One day, we’ll have to stop…
I try to recycle the most I can. I try to think twice before buying anything.
Why? Mostly because I prefer buying myself a piece of freedom than a new expensive “toy” that I will probably won’t use more than a couple of times… And, because I think that we should all reduce our consumption a little.
I know, if everybody stops consuming, economy won’t grow as fast and my dividend growth stocks won’t yield me the same return. But hey… I’m just dreaming. I know people won’t change that fast. It’s going to take several generations before we learn… 😉
If you want to harness the best return possible on your hard-earned money, you’ll have to invest wisely.
Someone said that there are two things that no human can avoid, taxes and death… Nice saying huh?
But he forgot another thing… Inflation!
Inflation is slowly but surely, eating your power of purchase. It’s been approximately at 4% over the last century. It is currently under 2%.
Does this mean that if you let sit 1$ in a jar, at the end of the year, it will only be worth 0,96$?
No! But the coffee you could have bought for 1$ at the beginning of the year will now cost you 1,04$. So your 1$ doesn’t buy you a coffee anymore… Unless you’re very nice with the clerk!
Compounding interest also applies to inflation unfortunately. So after 30 years, you’d need 3,24$ to buy the same coffee! Okay this is just a coffee, it’s not that bad. But now think about cars and houses. Your 20,000$ car will cost you 64,868$ 30 years down the road.
You see what I mean?
With that knowledge in hand, I had to find a way to earn more than 4% compounded interest return to make sure my money would at least keep up with inflation. A better return would make me richer.
The book “The rich barber” written by David Chilton gave me part of the solution.
Don’t be a lender! Be an owner!
This means that one shouldn’t “invest” his money in GIC, bonds and other guaranteed investment vehicles. Why? Because one would hardly keep up with inflation and lose money in the end.
To earn an above average return, one must take the risk of being an owner.
I decided to invest in dividend growth stocks of great companies out there who have a wide economic moat and large market shares. My money is at risk. But it is a calculated risk.
Real estate is also a common way of obtaining a good return. But it is not truly passive since you need to take care of the buildings, manage the tenants and stuff like that. Plus it is not enough diversified for my own tastes. I don’t like tying too much money in one single investment. But I know folks who made a lot of money with real estate.
Let compound & Retire rich!
The last tip, but not the least, and it is a hard one, do not withdraw money from your freedom fund!
Let it sit! Let it compound and work for you!
Many people who finally managed to set an automatic withdrawal from their account to their freedom fund on the day they receive their paycheck end up stopping after a while and withdraw their savings to buy… Whatever they buy…
I like investing in dividend growth stocks because I don’t see my investments as money anymore. I see them as workers. My shares of Exxon literally work for me and every three months, I receive a paycheck. Every year, I expect that paycheck to increase at a rate higher than inflation.
Why would I sell my shares and withdraw my money from such an incredible investment. It would be like firing a great employee to be able to buy a Playstation…
Do you have a plan to become rich, financially free or even millionaire?
Full disclosure : long Exxon (XOM)
Image courtesy of Grant Cochrane/ FreeDigitalPhotos.net