Take control of your money: save, become an investor and discover the power of compound interest
Our salary alone is never going to fill the gap between where we are and where we would like to be. If we work to live, all we are doing is basically exchanging our time for money, and this is the worst thing we can do. We could earn more money, but we can never have more time, and no matter how much we earn, we will always find a way to spend more. People who become highly successful are not just lucky: they are doing something different from everyone else. On their journey to becoming wealthy they have made mistakes, learned from experience and made adjustments to their investments, so that they can survive the volatility of the market in many different financial conditions. Achieving true financial freedom is possible, but until now only the expert professionals have had access to the right information and the correct strategies, which require knowledge and discipline. When you start this process, keep in mind that the final goal is to save for your pension. Historically speaking, the concept of a pension is relatively new: the United States propagated social security during the great depression, when the life expectancy of the average American was 62 years old. Today, married Americans have a 50% chance that one spouse will live to 92 and a 25% chance that the other will live to 97. This implies the potential of spending 25 to 30 years in retirement, even if most people could not financially support themselves for such a long period of time unless their retirement income is based on 30 years’ work. Both pension savings and their relative taxes present great challenges. Many people feel intimidated by the investment world, and this fear can hinder their chances of becoming financially secure.
Investment decisions have a strong emotional component, since money is a tool, a blank canvas that takes on whatever meaning or emotion we project onto it. What we are really looking for is never just money, but what we think money will give us: security and comfort, or variety, meaning, love and connection, growth, contribution and sharing. Money is certainly one of the ways we can transform the dreams we have into the reality we live in, but one thing is certain, either we learn to master it, or it will become our master.
We need to go from being part of the consumer economy to becoming owners, and the first step towards doing this is to make the most of the exponential power of compound interest. This is a significant tool that Albert Einstein once defined as the “most important invention in human history”. Interest can be called compound when, instead of being paid or withdrawn, it is added to the initial capital that was used to create it. This means that from year to year capital will continue to increase and accumulate interest on the interest, with a growth which is not linear, but exponential. The assumption is that money is left and not withdrawn for a long period of time. So, save and start to invest in your life early on, allowing your money to benefit from capitalisation. The mathematical strength of compound interest will do the rest to help guarantee your financial freedom.
To give an example of the power of compound interest, think of the American founder Benjamin Franklin, who left $1000 in the cities of both Boston and Philadelphia, on the condition that the municipal governments could not withdraw the money for 100 years. After a century of compound interest at 8%, the money had reached the enormous value of $6.5 million! Using the power of compound interest means going from working for money to making money work for you. In order to make this step, we need to make an important decision: spending part of our money on ourselves before allocating it to everything else.
So, how much of your salary can you put aside before spending a single euro on daily expenses? How much of your salary can you (and do you want to) leave untouched regardless of everything else going on in your life? The money you set aside as savings will become the fulcrum of your entire financial plan. This will be the foundation for your “Freedom Fund”. In your process towards financial freedom, you will have to deal with two phases: accumulation, which is the phase in which you save money for growth, and decumulation, which is the phase in which you withdraw your profit. If you continue to consistently feed your “money machine”, carefully managing it, without touching it, at some point it will become a safe mass of assets invested in a risk-protected and tax-efficient environment that will allow you to earn enough money to meet your daily expenses, your emergency needs and your retirement.