If someone offered you a million dollars cash, or offered to give you one penny and then double it each day for 30 days, which would you choose? I will spoil the fun and tell you that the latter choice would be the best option. One penny doubled each day for 30 days compounds to over $6 million dollars. Einstein was quoted saying, "Compound interest is the eighth wonder of the world. He who understands it, earns it... He who doesn't... Pays it." The example above proves that you don't have to start with a lot to begin creating wealth, but you do have to create a habit of saving and compounding. Here are a few thoughts on this crucial step in wealth creation:
1) The secret is to create a systematic habit of saving a definite proportion of your income. That's it! It does not matter how much your income is, what matters is that you are saving a portion of it. Seventy-eight percent of NFL players and sixty percent of NBA players either bankrupt or realize serious financial difficulties within two years of leaving the game. This proves that it doesn't matter how much money you make, what matters is that you create the habit of saving.
2) It is estimated that almost half of Americans have less than $1,000 in savings. Everything from cars, TV's, furniture, etc. is available to the consumer on monthly installment plans or can be purchased with a credit card that accumulates a balance with interest that is paid monthly. All of these shiny items can create a tendency to spend out of proportion to one's income which results in no savings and rapidly accumulating debt. As Albert Einstein references above, the ones that understand the principles of saving are the ones making money on a compounding basis and the victims of monthly installment plans are paying for it.
3) Saving money does more than just help you build wealth, it helps you build character. It helps build self discipline, perseverance and an understanding of deferred gratification. As a business owner, I am more likely to hire someone who saves money because I believe an employee will be more responsible with company funds if they have proven they can manage their own.
4) Saving puts you in a position to seize opportunity when it presents itself. When Henry Ford got started, he scraped together a few thousand dollars from a couple of his friends that had some cash in savings. Those initial investors became rich beyond their wildest dreams, all having been initially possible because they had some extra cash on hand from savings.
The laws of saving and compounding can either be your best friend or become your worst enemy. Next time you think about trying to keep up with the Jones’s, think about the power of saving and compounding. Also think about who is profiting from accumulating debt and monthly installments plans. Choose wisely.