This is the power of #exponential #growth. #Money multiplies, so the more money you have, the more money will grow. It’s true with #Warren #Buffett, and it’s true with everyone. Work hard now to live well later. #stocks #advice #financegoals #financialfreedom #wealth #rich #millionaire #finance #forex #investing #investors
Exponential growth. It’s how you become a millionaire.
Take a look at the chart above, which I recently posted on the Millionaire By 25 Instagram account, @25millionaire.com. Warren Buffett’s net worth is a great example of exponential growth. Since the beginning of his career, he has about doubled his net worth every few years. It was a ‘slow’ beginning, but from the start, his net worth doubled – from $5k to $10k, then from $1M to $2M, then from $17B to $36B.
Doubling your net worth every few years is a great goal, but for many seems unreachable. Looking at it from an investment standpoint, you’d need 100% return to get that, and with an average market return is about 9% a year, it seems very daunting.
That’s where the Rule of 72 comes into play. This rule helps you find out how long it will take to double your money. If you divide (your expected) annual rate of return into 72, you can find out how many years it will take you to double your money.
So using this new rule, if you invest your money into an index fund that has the same return as the stock market (9%), you will double your money every 8 years. How did I figure that out? I divided 9, the expected return on that investment, into 72.
So, you can stand to double your money in 8 years, just by investing in a low risk, an index fund.
Invest in a higher risk, aggressive growth fund, like PRGFX, and you can stand to double your money a lot quicker than 8 years. PRGFX has an average return of 15%. By using the Rule Of 72, we can find out that with this rate of return, it will only take 4.8 years to double your money.
However, we need to remember that this rule doesn’t account for capital gains or any other related tax. In reality, your investment won’t double that quickly, because Uncle Sam demands his piece of the pie (which is currently 15%).
How do you avoid all of these taxes?
Use a 401k. From Investopedia, “a 401(k) plan is a qualified employer-established plan to which eligible employees may make salary deferral (salary reduction) contributions on a post-tax and/or pretax basis. Employers offering a 401(k) plan may make matching or non-elective contributions to the plan on behalf of eligible employees and may also add a profit-sharing feature to the plan. Earnings in a 401(k) plan accrue on a tax-deferred basis.” Basically, you don’t get taxes if you put your money in this account. But remember, to get these tax benefits, you can’t cash out until you are 65. If you choose to earlier, you need to pay all of the taxes that you have missed. Also, employees who participate in the employer-sponsored plan will be able to contribute as much as $18,500 per year
You can turn $1 of spending money into $2 of investments, just by contributing to this type of investment/savings account, because your employer matches your contributions, usually contributing about 50% of what you contribute. Now throw in the tax benefits of the account, and you could very well double your money. Let’s take a look at the math.
You contribute $1000 to the plan, free from any income tax. Because your employer matches your contributions 50%, they contribute $500. You now have $1500 invested in a tax-deferred account. Without taxes, you’ve just saved $250 in taxes on your contribution.
If you hadn’t put these wages in the account, you would only have $750 of spendable money, so you’ve already effectively doubled your money.
Also, there are 401k’s for self-employed people as well, with the same maximum contribution. However, it is a solo plan – so nobody is there to match your contributions.
Now let’s get back to the Rule of 72. You’ve probably forgotten by now, so let me remind you – a 401k is an investment account. This means you can buy and sell stocks and funds, tax-free.
You can buy PRGFX, and receive its 15 percent return – but not pay capital gains. Think about it – you just bought the fund with cash that you’ve already doubled. Now, you don’t need to pay taxes. I don’t know the exact figure, but by using a 401k, that 4.8 years it takes to double your money using that fund drops down to just about 2.5 years.
So now, your cash is growing exponentially, and you continue to buy in, more and more. This just adds fuel to the fire, and your wealth starts multiplying from $6K to $12K to $24K all the way until a million. If you start saving in a 401k as a teen (which can be done), you’re just that much closer to your goal of exponential growth, doubling your net worth, and achieving Millionaire By 25.
Remember, work hard, and save now to live well later.