The Arithmetic Of Wealth

The shiny new car is great. It’s a chick magnet (if the heir is a male) and provides great popularity, dates, and memories he could not have otherwise have gotten. Ten or 15 years down the road the car is old, dinged up and becoming more costly to keep running. Eventually, it is junked and the student is left with his memories.

The alternative, difficult for college students to envision, is to take the $25,000 and invest it. Let’s suppose it is put into an investment that earns 10% per year. When he turns 60, he will do so without any of the memories the car may be produced, but he will have (from Table One above) (25,000/100)*($4,526) = $1,131,500. At age 70, if still untouched, it would be worth more than $4.5 million. (Taxes were not factored into these calculations.)

The point is that “dear Aunt Tillie” made this young student a millionaire, had he known and been able to exercise restraint. I would like to believe that examples like this influenced some students.

“The Average Joe”

You are 40 years old, just an “average Joe.” You might be a millionaire already, in the sense that the student above was/could have been.

You have never thought of being a millionaire; never even considered it possible. But, take a look at your personal balance sheet. You have savings of $10,000, a 401K with $70,000 in it and a $400,000 home with a $250,000 mortgage. Are you already a millionaire like a student above was? Let’s see.

We make the following assumptions:

  1. You earn 10% per year on your savings and 401K.
  2. Your house is appreciating at 3% per year and your mortgage will be paid off in twenty years.

What will be your financial situation be at age 65? Based on the assumptions above, let’s extend these numbers to their future values. As you will see, you are already a millionaire so long as you don’t act like the college student. That is, merely the passage of time ensures that. No additional saving is necessary. No additional 401K contributions are needed. (Additional savings and 401K contributions are always recommended but not reflected below).

  1. $10,000 in savings will grow to $108,000
  2. 401K will grow to $758,000
  3. Home mortgage-free will be then be worth $656,000

You are today, without any additional savings, headed for retirement watching what you already have grow to $ 1.5 million

These assumptions regarding interest rates, time horizons and your particular circumstances can easily be altered.

Conclusions

Einstein was properly impressed by the power of compounding. None of us are Einsteins but all of us should be equally impressed if not overwhelmed. Knowing this power, you can go out and get wealthy. Use this knowledge to plot your road map to wealth.

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