Thanks for dropping by Safe Investing South Africa. I am on a journey to build wealth my way. For any questions or comments, feel free to contact me.

21 Sep 2012

WEALTH CREATION GETS MUCH EASIER

It's tough starting on a journey to create and build wealth when you have debt and lots of financial commitments. Even I get that. But with time, wealth creation gets much easier. That's the reason the first million rands is the most difficult to save/ invest/ grow. I will try to simplify what have been the reasons in my own journey:

Compound Interest
You probably know about the power of compound interest but for the benefit of someone who doesn't, I will still explain it here.
If you save R1000 at 10% per annum interest rate, it earns between R8.20 and R8.40 on the first month, depending on the number of days for that month. That R8.40 is added to the R1000 and earns a few cents extra the following month. In month 12 you earn about R9.30 from the same R1000 and it will have turned to more than R1100. You have done nothing to your R1000 remember, yet it managed to get itself an earning of R104 in that year. The most important factor is that, your interest earns interest too. My example amount may be too low to create excitement, I know.

Lets assume you save R1000 per month to make this more interesting. Off course your first month will earn the R8.20 in interest. Your 12th month will earn R106. See where I’m going with this right? And your invested R1000*12 (or R12000) ends up being R12,668. Earning itself R668 in 12 months.

Even more interesting would be if you had that R12000 upfront, the power of compound interest would work even harder in growing your money. You start off with R101 interest for the first month and end with R111. Not to mention that at the end your R12000 becomes R13254 over 12 months, earning you a whooping R1254. Everyone should be saving something. Why most people don't, beats me.

Now think about a scenario where our R12000 had an extra zero (R120 000), we would be talking an extra R12 548 in interest for the year. If it was more than a million rands, like R1 200 000, we are talking R125 475 in interest before tax for the year. More than R10,000 per month at 10%. Even if you can only spare R200 per month, it grows and faster with time.

Money Working for You
When you start investing your money, you work hard at saving every cent you can save. It's a struggle that needs tons of will power, personal finance self help material and great company. You even work hard at convincing your family to be supportive and more frugal. Over time, your money starts working harder than you do. See the examples above. You may end up retiring earlier, if you so wish and living on interest and dividends that your money is earning for you. Isn’t that what life is all about. A choice to do what you love doing. And working being for the love of working and not for money.

Money Growing Faster is Motivating

My Emergency Fund is with Nedbank Just Invest account. It earns some 4.65% interest per annum, thanks to low interest rates. Anyway, I grow my Emergency Fund with R5000 per month. It earns about R1200+ per month and I top that up with about R3800 to make it a round R5000 figure. I love working with multiples of five.
Anyway, the amount of money I add to top my EF up is getting smaller over time. That's because my interest itself is growing. That is a huge motivation. I look forward to topping it up, which makes it fun rather than a sacrifice.

Another example would be my mortgage. Initially, my interest was almost as high as my installment. An installment was like a drop in an ocean. When I started paying more and more to my home loan, the debt was going down faster, the interest was getting lower and the adrenaline drive was keeping me on track. I update my own spreadsheet every time I transfer extra into the bond. My spreadsheet looks better every month. Its motivating.

Experience
When I started my wealth building journey, I really didn't have a plan. I knew that I wanted to have money, and no debt. I had no idea how to do this right. There were no personal finance blogs for me to stalk. I made tons of mistakes. With my experience, I now take better decisions; I set goals; I keep track of all I own. I am more matured and wise when it comes to financial planning. I fully agree with this post's title: wealth creation gets much easier over time. Keep moving.

Remember to email me if you want to talk to me.

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