4 Lies about getting rich
Lie #1: Getting rich happens over night.
Contrary to popular belief your income is not the most important factor in building wealth. It’s Time. Time is what creates the fortune. This happens through the magical power of compound interest. Compound interest is: interest that gets added to the initial investment, and that added interest also earns interest.
It’s easier to see if I show you this example. Image if you start investing $500 monthly, and earn an 8% return. In 25 years you would have about $400K, but in 45 years you would have over $2.5 million. This is where people cringe. Having money at 75 is not motivating, or at least, doesn’t make you feel rich.
It doesn’t have to take 45 years, it doesn’t even have to take 25, but what I’m trying to show you is that it’s Time that’s making the money. The investment is actually modest, $270K, compared to the ending balance 2.5 Million. Which brings me to my second point.
Lie #2: You need a lot of money to start investing
Most people think you need a “substantial” sum of money before there is any money to manage or invest, but that’s a residual effect of marketing. Almost all financial professionals make their money by selling financial products, or managing portfolios. They get a 1% fee for the money they manage. So if you give them $10K to manage, they earn $100. For the entire year! As you can see you need to be managing a lot of money to earn a living this way. This is why the marketing is geared towards people that already have money. This creates the subconscious feeling that you need a lot of money before you have anything to invest.
However, “Waiting until you have money” will cost you a fortune. Because as you just learned it’s Time that brings home the bacon. Most people are waiting till they have $5,000+ , when I’m talking about finding $50’s, $20’s and $10’s. I admit will be hard to impress your friends by telling them that you just invested $50. But worry not, they will drool with desire when you start traveling more and working less.
Lie#3: You have to take big risks
It’s a popular belief that you have to take big risks to get a large reward. That’s a fool’s game. If you follow that advice you will win. You will lose. But it’s hard to come out ahead with odds like that because it takes a lot of time to come back from a loss.
Example: If you invest $1000 and lose 50%. Your new investment value is: $500. To get back to where you started you need a 100% return on your money just to break even! Guys, I’m all for a great rate of return, but 100%? That doesn’t happen very often. What’s more likely to happen is that you will get less that 10% rate of return. Using the numbers above, and assuming your make a 10% return, it would take 7.27 years to get back to your initial investment value of $1000.
So, before you invest, it’s imperative to you know how much you can lose. (Just because you’re investing $1 doesn’t mean that the entire dollar is at risk.) If you do not know how to calculate the risk, learn or ask someone who does. Warren Buffett, says it best in this quippy quote: “Rule #1. Never lose money. Rule #2 see rule number #1.” As wild as it sounds, not losing money, is the most important part in making a fortune.
Lie#4: Stocks make you lot of money
The stock market or other financial instruments are good to help you manage and preserve your wealth, but it’s the slow boat to China if it’s the only vehicle you’re using to build wealth. Why? Because the stock market’s rate of return is around 6%-8%. ( And this is considered good!) With returns like that you need to be feeding your investment tons of cash if you want to stop working before your 65. There is an easier way.
How do you get a high rate of rerun without taking risk? By understanding the “emotional advantage.” People are driven by emotion. Specifically fear and desire. This is what makes money the most emotional piece of paper on earth. It has the ability to turn your desires into reality. This can be very exciting!
I say, “If you want exciting, jump out of an airplane. If you want to be rich you have to be smart.” The truth is most people won’t do what’s smart. Smart people will do dumb things. They will be seduced by tales of overnight riches. The will buy the “hot stock” they see on TV, or their dream house regardless of price. This is where the advantage lies. Again, an concrete example works the best.
Imagine you are selling your house. It is priced at $600K. You have a smart agent, he creates an air of scarcity. A bidding war ensues, and a buyer offers to pay $700K. When this happens the broker will ask for a “no mortgage back contingency clause.” What this means is that the the buyer is promising to buy the house even though the bank might value the house at a lower price. So, if the buyer bid $700k and the bank says you only can get a mortgage for $600K. The person buying the house is paying $100K more than the intrinsic value. ( What the bank thinks it’s worth.) The extra $100K is the emotional premium. The craziest part is the buyer consented to overpay for the property. This happens all the time! Don’t let it happen to you.