Compound returns, the eighth wonder of the world. If you have a capital sum, and you re-invest the income you receive from that capital sum, it just quietly rises like dough. If you have £10,000 and can get an 8% return, in twenty years it would be worth £46,600.
Compound returns are great but how do you get the capital in the first place?
What we do as habits are really powerful. If we buy a coffee on the way into work every day for £2.50 we spend well over £500 a year. If we save the same amount, as a habit, each month the drip, drip effect of regular saving quickly builds up your capital.
Treat saving like a bill. It is difficult to save, but if you set up a standing order and treat it like a bill then it might be possible – after all, you wouldn’t miss a mortgage payment.
Shelter it from tax. There are ways to make your savings go further to avoid tax on the saving, income or capital gains. Pensions and ISAs can help you save tax.
Combine and prosper. So what if you make regular savings, save the income your capital generates and shelter it from tax? Well in that case you can make yourself rich. If you save £250 a month every month for 20 years and get a return of 8% you will have a fund of approaching £150,000 at the end of it. A useful capital sum.
Consumer debt, credit cards, personal debt; latter day slavery?
The very opposite of letting your money rise like dough, is the use of consumer debt. The most compliant slaves are those who volunteer for their slavery. It is my earnest opinion that easy credit is a form of latter day slavery. I don’t think I’m being melodramatic. Let’s have a look at what it does:
- Debt is calculated so that as you finish paying for a product you want to replace it, you’ve guessed it, with more debt.
- Debt interest is very high so the repayments gobble up your income.
- Debt repayments take up a large percentage of people’s income so they can’t save their way out of debt.
- Debt forces people to work hard and take stressful jobs they don’t like.
It is so very easy to take on consumer debt, we are constantly being told that we’ll be happy and complete if we have a new car, the latest phone, the latest fashion. But the worst thing is we don’t really need stuff to make ourselves happy, and we all know that deep down. So debt forces us to work giving up our best years for things we don’t need. Slavery? What do you think?
So do this:
- Convert any credit card balances into loans with realistic monthly payment plans.
- Don’t take out any more loans, credit cards etc
- If you have to have a credit card (I do) pay off the balance by direct debit in full each month (I do). The banks will resist this but persevere.
Get debt free then watch your money rise like dough.