In the last step on The Ten Steps to Wealth, you were introduced to a definition of the financial term ‘assets’ that is somewhat different to the way we tend to use it generally. I wonder if it stirred your thoughts as much as it did for me?
In Step Nine of the Ten Steps to Wealth, Paul discusses the power of compounding. Even Einstein was once asked if there were mysteries in life he couldn’t understand, and his reply was:
“The miracle of compounding”.
One of the key points for me in this step was to understand that the power of compounding is directly related to time and how it will take discipline in the early stages to let compounding work for you.
Compounding Personal Goals
The power of compounding also works for reaching your goals even if they are not financial: – if you take small steps, consistently (at a percentage rate of increase) for a period of time the results will be amazing!
For instance take the goal of getting fitter by walking, aiming to eventually be able to walk 10 kilometres. If you started at walking a 500 metre walk on the first day then by adding just 3% to your journey every time you walked , you will reach your target of walking 10kms at day 101. At 3 days a week,it would take about 30 weeks; just over half a year. On the final walk you would add only 297m to reach the 10km target. . That sounds doable !
By comparison if you didn’t use the power of compounding and you only increased your distance at an extra 15m only per day (3% of 500m). At this consistent rate it would take 635 days to reach the target of 10kms! Alternatively you’d have to walk an extra 94 m EVERY day, to achieve the 10 km mark in the same amount of time as the compounded result. The point of the second comparison is that it would require a 25% distance increase in the early stages, which could be self defeating if it’s too hard ( ah, yes… all those abandoned exercise plans in my past!)
But let’s not forget the real beauty of it all is that you can reach your goal if you just start!!!
The other key point for me is the financial term “critical mass” coined by Paul:-
Critical mass is where you can take whatever you like from your nest egg to support the lifestyle you want and your portfolio continues to grow in value over time.
But the biggest AHA!! moment I had this week was related to a part of that definition of critical mass: …”the lifestyle you want….”
If you want a very simple lifestyle, say one of being a “surfie, then you may need relatively little income to maintain a shack, simple food and access to some surf.
For a more moderate lifestyle, say one where you plan to holiday overseas every 5 years, maybe a closer holiday in between times, eating out once a month, entertainment once a month ( movies, theatre), some life insurances, moderate car and similar, then this would take relatively more income to the very simple life described above.
For a broader lifestyle with holidays overseas every year, eating out a few times a month, entertainment a few times a month, all insurances in place, a nice car or two etc, then this would require even more income than the moderate lifestyle.
Only YOU can describe the lifestyle you want!
It may be simple it may be broader. There is no right or wrong. It’s very personal.
The lifestyle you WANT may be different to the lifestyle you can currently AFFORD, although the two may be exactly where you want them to be now– WOW – congratulations if you have achieved that ! I’m still trying to define my lifestyle particularly one which is not dependent on 9-5, 48 weeks per year…
How Close are You?
No matter where you need to be financially, if you subscribe to the Ten Steps to Wealth, in Step Nine you will find a rule of thumb formula for determining what your critical mass might be. There may be some surprises in store: some of you may be closer than you think and others may be shocked by how much you need!