Everyone dreams of financial freedom. The idea that you automatically have enough money to not need to work and can instead pursue whatever goals or objectives you want in life, without needing to worry about working a job to make sure that the bills are paid. However, many of us have not been taught the basics of financial management to make this a reality. Sitting on the sofa all day is great for getting fat, but if your money is just sitting around, it won’t get fat. If you want your money to grow, you have to put it to work. Money: Master the Game by Tony Robbins outlines how this can be done. So, what can we learn from this book?
Compound interest is the key
There is a reason Albert Einstein once said that compound interest is the most important invention in human history. It is the key to financial freedom. Putting your money to work means to take advantage of compound interest. But if you are like most people, your money is probably not working very hard. It is going to be sat in the bank growing very slowly. But if you put it to work in a low-cost index fund, the upside is significant over time. For example if you put $2000 in to an S&P 500 fund for your baby on the day they were born, if they did not touch it until retirement it would be worth over $1m by the time they retire based on the average return on investment over the past several decades despite the 2008 global crash and depression of the 1930s. However, many are not aware of how compound interest can turn relatively small sums of money into large amounts of money during the course of their lifetime. But understanding and taking advantage of the effect of compound interest is key to financial freedom.
Use Dollar cost averaging
In addition to compound interest, it is important to continue to add to your investment fund each month. The stock market goes up and down on any given day. Trying to time the market is practically impossible, but there is a proven way to take advantage of the overall 10% annual average return and that is to consistently invest every month. For example, if you had only invested the day before the wall street crash of 1929, it would have taken you 25 years to break even. But if you had invested every month for that same 25-year period, you would have experienced a larger than 10% annual return. This is because of dollar cost averaging. Each month you are buying in at whatever the price is. So, if you buy today at 100 and tomorrow at 50. Your actual Price is 75 and so on and so forth. This means that even if the market does have a crash, you are still able to grow your money over time. The same was true during Covid-19 where if you invested throughout 2020 you would have made a very good return indeed.
What is your end goal?
Most people think about retirement as a certain age, but the truth is, that it is not an age, it is a financial number. But this financial number differs for everyone depending on their goals. For example, if you like to live a nice simple life and just need enough money to cover your bills, you will only need a certain amount. However, if you want to go on a fancy vacation every month when you are financially free, you will need a much larger number. It is important to understand what your number is, in order to align your goals accordingly. Most people think that they need tens of millions of dollars to be able to retire. But if you could live off of $50,000 a year, assuming a 4% withdrawal ratio you would only need to amass a little over $1.2m. If you started taking advantage of compound interest at 20, you would only need to save around $100 a month from 20-65 to hit that number.
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