Friday, January 27, 2006

I'm Young - How Do I Get Rich? - Part I

Youth is a great asset for building wealth.

There are two factors that provide an avenue to wealth for the young - compound interest and the freedom to speculate in a wide range of investments.

If you are young you have time working for you. Rothschild talked about compound interest being the eighth wonder of the world.

Learn the rule of 72.

divide the interest you receive into 72, that is how many years it will take for your money to double. At 1% it will take 72 years, at 25% it will take less than 3 years to double.

Real big gains don't work out, but "72" is a nice rule of thumb.

It also works the other way. Your uncle brags he bought a car in 1980 for $5,000
and sold it in 2000 for $20, 000. Sounds good.

5k doubled is 10k, doubled again is 20k - that is two doubles in twenty years. Take the ten years to double - divide it into 72 - he earned about 7.2% on his money. Good - but not great.

If you can get 15% on your money, a very tough thing to do, it will double about every 5 years.

If you are 15 years old and save $1000 - at 15% it will be $2000 at your twentieth birthday. That is enough to buy a used motorcycle and start over. If you leave it alone it will be $4000 when you are twenty five, $8000 when you are thirty, $16000 when 35 - 3200 @ 40 - 64k at 45 - 128k @ 50, --- and over a quarter million dollars by the time you retire early at 55 years old.

What happens if you drop in another $1000 next year and let it compound. Maybe you can drop in $3ooo when you are 18 and get a good job.

You may not have to wait till you are 55 after all.

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