Discusses the wealth building financial security principles of compounding interest, leverage and property investment.
We would all like to consider ourselves enjoying the good things in life, not having to stress about finances, and not having to be concerned about growing old, or poor.
But if we are currently living from paycheque to paycheque, never seeming to get along or having any savings, how do we change things? Where do we start in our search for financial security?
The best thing we can do, is sit down, take a deep breath and consider the differences between the haves and the have nots, the achievers and the laymen. What is it that the successful and wealthy do, that is various to us? What are the principles that they employ to create wealth?
Once we find out the principles that others who have built financial security have used, it appears that then the only step left would be for us to try and duplicate the process.
Following is a list of some of the wealth financial building security principles that we have discovered in our research and conversations with successful people.
These ideas have been utilized extensively by those who have already created enormous wealth.
Table of Contents
Use these 6 Easy Steps to Building Financial Security:
1. Use the power of Compounding Interest/Growth
John D. Rockefeller and Albert Einstein once explained compounding interest as the “Eighth Wonder of the World”.
Compounding is also directed to Rate & Time because the longer the time, and the higher the growth rate, the greater the results of compounding become.
Compounding works by letting any interest earned gains to be added to the initial investment, and then the next lot of interest is calculated on the sum of the two, and so on. Interest is earned on interest on investment. This gives the effect of exponentially increasing the value of an investment of capital.
One of the easiest methods to calculate how compounding interest works with various rates of return is to become familiar with the Rule of 72. This rule states that “The number of years that it will carry for your money to double is 72 divided by the interest (growth) rate”.
Therefore if you have $1,000.00 invested at 10% interest, then the number of years that it will take for your money or capital to double to $2000.00 is 7.2.
72 divided by 10 = 7.2
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2. Use the tried and true process of investing in residential real estate
Statistics show that over 98% of the world’s millionaires have created their money through property.
It should really not come as a surprise, because everyone requires a place to live, and generally, at least one-third of the population is renting. Property is essential, so it can never go out of style.
As the population increases, so does the requirement for housing. The laws of supply and demand therefore will ensure that prices hold rising.
Banks believe the property to be one of the most secure investments and because of this, they will loan you a high percentage of the value. By following this method, you can also start building financial security. This leads to the next principle on our list.
3. Using Other People’s Money or Gearing is a mechanism used extensively by the wealthy
Why is utilising Other People’s Money so important? The reason is that it is feasible to use “leverage”, also known as “gearing” to receive a greater result than you could have obtained using only your own contributions. The word leverage reaches from “lever”. As you understand a small amount of force applied on one end of a lever, can produce force far greater than what was originally exerted. A lever has the effect of multiplying the strength exerted.
In the case of investing, it is required as leveraging when you employ just a small portion of your own money, say 10% deposit on a $300,000.00 house, and borrow (leverage) the rest, in this case, 90%. The capital growth that you profit from is then computed on the full $300,000.00, not just the $30,000.00 that you personally contributed, having the impact of multiplying your way of building financial security capital gain.
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Gearing allows you to purchase a far more costly property than you could if you were using only your own money. Controlling assets of a higher value mean that compounding evolution has more to work on, and therefore your net worth will increase much faster. Gearing allows you for building financial security and investment portfolio faster than would otherwise be possible.
4. Learn to Set Goals
Most self-made, successful business individuals and investors have achieved their success by planning to do so.
They have set goals for themselves and acquired them. They invest time in reading and learning about wealth invention and are happy to understand other people’s mistakes and experiences, as well as their own. They set goals and acknowledge that they will be far better able to achieve them if they familiarise themselves with the ways in which other individuals acted and the things that others have done to succeed. Wealthy individuals create wealth by carefully utilising the income that they have available to them to their best advantage. They know that working harder and longer hours is not the pathway to achieving financial freedom, instead, they have to utilise what they have and make it flourish.
Having a goal enables you to focus your energies on planning ways to achieve it. When somebody makes a decision and begins focusing on achieving a specific goal (and actually better in a specific period of time), the powerful subconscious mind goes to work and begins playing with conceptions and developing strategies of different ways to bring about the successful completion of the goal.
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When you set yourself a goal both you are conscious and subconscious begin working on it and begin to develop an action strategy. You will start asking yourself questions about what requires to be done to enable you to reach your goal. Many find themselves coming up with amazing ideas and solutions to issues or obstacles that have been in the way of achieving their goal. The subconscious is an extremely powerful mechanism. The more frequently you remind yourself of your goal, the more your mind will work on methods for you to achieve it. Some individuals find answers come to them when they are asleep and dreaming.
Have you ever witnessed that there is no correlation between being wealthy and having a high IQ or a university degree? If there were, every doctor and university graduate in any field would be wealthy, and as statistics show, most of them end up in the same situation as 95% of the population.
Setting Goals helps you to focus your energy on developing workable techniques. Setting long term goals helps you look at the big vision. Once you can see the big vision, you can develop small sub-goals. Sub goals are small straightforward goals that can be followed one step at a time. When you progressively achieve your sub-goals, you will get closer and closer to your primary goals. Goals are simply objectives to succeed. It is said that if you “Fail to plan, then you plan to fail”. Goals help you keep motivated and energetic. Progressively achieving your goals can lead to a fantastic feeling of fulfilment of building financial security.
5. Learn how to Budget.
Budgeting does not have to be boring. All you require to do is to work out:
What your incomings are. What your regular expense is and then make sure that all of your other expense is less than the amount remaining. This will allow you to start saving and investing a small position of your income. Budgeting puts you in the management of your finances.
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6. Learn about investing – in precise about property investing.
Learn to research the property or real estate market, so that you will be capable to purchase properties that will not only give a good rental yield but will also return the best capital growth potential. Read investment books and articles. Read autobiographies of successful individuals. Speak to individuals who have succeeded in doing what it is that you want to do. The more you learn, the more comfortable it will be to recognise a good investment.
Find out about Negative, Neutral and Positive gearing – and why gearing is an invaluable mechanism, which will enable you to build up a wealth base in accelerated time, compared to if you only invested your own hard-earned dollars.
Once you have educated yourself and understand why investing in property is such a powerful mechanism, you will be able to venture on the road to building financial security.