But Not Necessarily “Easy.”
When I was a kid, I lived in a relatively economically depressed area. It was a rural community in upstate New York. The biggest employer had been an air force base that pulled out when I was 13. The population of the nearest city plummeted and the economy tanked. There weren’t many examples of wealth for me to learn from, so I grew up thinking what most people think. Rich people are either born with money, or they get lucky with a business idea, or win the lottery or some other sort of get rich quick endeavor.
Fast forward to the present, and things have changed drastically. Most of my peer group has achieved some level of “wealth” that would’ve been considered substantial in my home town. Being wealthy is almost normal to me and my peers. So much so, that it’s easy to forget that “the top 10% of the wealthy hold 69.8% of net worth in the US” Statista.com
In fact, it would be easy to forget, if I didn’t remember what it was like to be young, wondering how the hell I could achieve some semblance of success. All I wanted was a road map, someone to just tell me what to do, and I’d do it! Well, I can’t give you a road map, but I can give you a pretty basic formula that will help if you’re also looking for the key to growing your wealth.
You see, what I now understand, that my younger self didn’t, is that growing wealth is simply just math. There are inputs, and an output. As the inputs change, so do the output. There’s no secret, just a simple formula. If you’re wondering what it is, here you go:
Now, if this gives you nightmare flashbacks to 8th grade algebra, relax. I’m going to go through this bit by bit, so you understand. Some of you may recognize this formula as a derivative of the compound interest formula, and you’d be correct. This IS the compound interest formula, with one caveat. I changed P (Principle) to I – E, (Income – Expenses) to emphasize that one needs to have a surplus after their expenses to even begin growing their wealth.
Let’s take an example. Let’s say you managed to save up $10,000. This would be your (I-E). Let’s say you put that $10,000 into the S&P 500 in a normal period, not one where Jerome Powell is printing insane amounts of money. So, in this example, you’re able to get a nice normal 8% return (r = .08). Now let’s assume you leave that money for 10 years (t = 10) and the interest compounds annually (n =1)
At these inputs your $10,000 would have grown to $21,589.25, which is a 216% total return.
Pretty insane right?
Now here’s where the formula gets fun. Let say you were able to save $20,000 instead of $10,000. What’s your 10 year total look like then? The answer is $43,178.50
Now let’s stick with the $10,000, but assume you let your money grow for 20 years instead of 10. Now, your $10,000 dollars is worth $46,609.57!
Oh, but we’re just getting started. What if you weren’t just a passive investor who leaves his or her money in the S&P. No, instead you are able to find better investment vehicles (cough cough, real estate), where you can get a minimum 20% interest. Now let’s see what your $10,000 dollars is worth after 10 years.
$61,917.36
20 years?
Wait for it….
$383,376!
Can you see how your wealth is directly linked to these factors? How much you invest, how long you invest for, and how high of a return you are able to get. That’s it, there is no magic to it. It is literally just these few inputs that decide how wealthy you become.
If you spend all your money on stuff, and don’t have any left after your expenses, you are knocked out of the game before you even have a chance to begin.
If you save but only get an average return, it will take LONGER for you to achieve your desired outcome.
If you are young, and have time, and can wait longer, you’ll accrue more money that someone who has less time. It’s really that simple.
One thing to note, is this formular only calculates the initial $10,000 you invest. But what if you saved $10,000 every year, and added another $10,000 to the first. So now at year 1 you have $10,000 compounding for 10 years at 8%. For the next 9 years your investments looks something like this:
| Year | Amount | Interest Rate | Time Left | Total |
| 1 | $10,000 | 8% | 10 | $21,589.25 |
| 2 | $10,000 | 8% | 9 | $19,990.05 |
| 3 | $10,000 | 8% | 8 | $18,509.30 |
| 3 | $10,000 | 8% | 7 | $17,138.24 |
| 4 | $10,000 | 8% | 6 | $15,868.74 |
| 5 | $10,000 | 8% | 5 | $14,693.28 |
| 6 | $10,000 | 8% | 4 | $13,604.89 |
| 7 | $10,000 | 8% | 3 | $12,597.12 |
| 8 | $10,000 | 8% | 2 | $11,664.00 |
| 9 | $10,000 | 8% | 1 | $10,800.00 |
| 10 | $10,000 | 8% | 0 | $10,000.00 |
| Grand Total | $166,454.88 |
So you see here, each $10,000 investment is set to work compounding on its own, which adds to the overall total.
Whether you’ve seen calculations like this before or not, the point I’m trying to make is you have control over your own wealth. You can decide to save more than you earn and invest that money. You can choose to be a passive investor, or learn how to achieve greater returns. You can start now, instead of waiting. If your earning potential isn’t where you’d like it to be. Find ways to earn more, and invest that extra money. When I learned how this equation worked, it changed my life. For the first time I realized it wasn’t luck, or being born into money that would make me wealthy. It was up to factors that were entirely in my control. After knowing this, if I didn’t achieve my goals, I had no one else to blame but myself.
P.S. If you want to play around with compound interest calculators, there are many on-line you can use. For this article I used the one at:
https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator
Wishing you the best. Until next time.
Collin
