The Overlooked Wealth Building Trait
Women’s Money Week Feature Article-How to Take Control of Your Financial Future
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My Favorite Wealth Building Example
Take this quick quiz to help you understand how your money grows as you reinvest the earnings:
THE POWER OF COMPOUNDING QUIZ
Choose either Option 1 or Option 2
Option 1: Receive a lump sum payment of $100,000 cash at the end of one month.
Option 2: Receive the total value of one penny doubling on the first day of the month and the resultant amount doubling every subsequent day until the end of the month. For example, on day one you get one penny, on day two you get two pennies, on day three your wealth grows to four pennies and on day five your money doubles to eight pennies and so on until the end of the month.
Option 1: Choose this option and on day 31 you have $100,000
Option 2: Choose this option and on day 31 you have $10,737,418.24
Would you believe that one penny doubling every day for a month could be worth over ten million dollars at the end of the month? It’s unfathomable. Of course, getting one hundred percent return every day for a month is impossible, but this example demonstrates how reinvesting ones earnings over long periods of time can build great wealth.
Let’s get a bit more realistic. Invest $5,000 per year in a workplace retirement account and reinvest the earnings. Populate the account with stock and bond mutual funds which earn an annualized return of 7.5%. Start at age 25 and stop at age 65.
How much do you think your $200,000 ($5,000 per year for 40 years) is worth?
At age 65, your 40 year annual contributions of $5,000 per year is worth $1,136,282. Yet in the interim, you may feel like your money is not growing at all. Some years growth will be better than others. After 20 years, your contributions will only be worth $216,523. After 30 years, your $5,000 per year investment is worth $516,997. Add another 10 years and you are a millionaire.
Patience is Crucial in Investing
It’s difficult to imagine that over time, relatively small amounts of money can reap great benefits. Starting out, it may be difficult to find $5,000 per year to invest. But as your income grows, if you keep spending at bay, it’s easier to make that annual investment.
Many folks want it all now, and don’t understand that patience and compounding of returns is an important component in building wealth and getting rich.
How to Take Control of Your Financial Future
1. Begin saving and investing now.
2. Continue through thick and thin.
3. Do not let anything stop you from contributing and investing funds for your future.
Barb Recommends Articles from Women’s Money Week
- On Women’s Money Week: How to Take Control of Your Financial Future
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Barb Across the Web
- Women’s Money Week-From Barbara Friedberg Personal Finance: How to Talk About Money with the Family – the M Word
- Best Money Tips @ Wisebread
- Yakezie Carnival at Debt Black Hole
- Carnival of Financial Camaraderie at Debt Roundup
- Carnival of Retirement at Master the Art of Saving
How patient are you? Does your saving and spending change with your moods?