Uncomplicated Wealth-Building for Beginners

A Guide To Get Your Money Machine Running On Cruise Control !!

Money is one of the most underestimated aspects of modern lives, and also one of the most misunderstood ones. Coming to the US as an international graduate student the last thing on my mind was to figure out how to become wealthy. In my mind becoming rich was always linked to winning the lottery at the local grocery store or being born into a wealthy family or owning a big business. Other than these my mind considered it as something I only needed to think about later in life. To me it was more important to pass my insane courses and finish writing those research papers I have been putting off for the past leap year!

The question arises: Why does one have to be rich? Can I not live a simple life? Why do I need to be materialistic? Money can drive me nuts and make me a bad person. Then why do I need to worry about it other than saving some and spending for my needs? I am lucky to have enough and enjoy what I am doing then why do I need more?

These are all good questions. It is very important to write down why you want to earn the money you want to. For some it might be about paying for a child's college education which is increasing by 4% every year in the US. For some others it might be about buying that dream home, and for others it might be about having a peaceful retirement taking care of the health care costs which are rising at 6% a year. We all know that as a family grows the expenses are obviously going to increase, so given the additional dependents and the increasing costs means that if your income and earnings don't grow by at least 4%, you may not achieve your financial goals. Also if you find out that your passion and your job are not the same, achieving financial freedom earlier in your life will allow you to do what you are passionate about without having to worry about generating income working on something you don't enjoy any more!

Additionaly, the most under-rated power of money is the happiness and satisfaction that comes from giving! Money has the potential to transform others lives and in the modern world sometimes we can be so caught up in our own busy lives that thinking about Charity is either not a priority or a luxury of the rich! The fulfilment that comes from charitable giving is a feeling that cannot be explained but can only be experienced by doing!

In this first of the series of articles, let us briefly talk about how to grow the money.

The most powerful concept of money is the power of compounding!

Like Warren Buffet says: "My wealth has come from living in america, some lucky genes, and COMPOUND INTEREST".  Wealth Building does not have to be about taking big risks in life. Basic planning, understanding, and tapping into the power of compound interest which I will explain shortly, are all that are needed to become rich.

Compound Interest is a simple concept.

Option 1: Let us say you have a savings bank account with 10,000$ in it that has a 5% interest rate per year. This means you make 500$ per year as interest on it. If you took those 500$ for yourself, the next year the same 10,000$ would be invested to give you another 500$. This goes on and on if you pull out the interest at the end of each year and keep in your pocket. This way you earn simple interest.

Option 2: Let us say you do not pull out the 500$ every year. You now invest 10,000$+500$ into the next year and that earns at the end of the year interest on 10,500$ which is 525$ (25$ more than the previous scenario), and the year after: you now invest 10500+525=11,025$ and then earn 5% interest on that amount and end up with 551.25$ as interest for that year (51.25$ more than original year). Now let us do the math for long term. 

Let us say Tom did the Option 1 and kept the 10,000$ in the account always and made 5% every year for 10 yrs and then took all the money out. He would have ended up with a total of: 10,000$ + 5000$=15,000$ after 10 years including the money he put plus the earnings on that money over time.

But if Tom never took the interest earned every year out of his bank account, and allowed even that interest to grow in that same account like Option 2, he would end up with: 16,289$ which is a 1,289$ higher than the Option 1. This demonstrates that given enough time, just by not tapping into the savings immediately, a small amount can add up to huge value over the long term through the power of compounding!

So allowing money the time to grow, and the discipline to not spend it all can give the money machine the oil it needs to keep working for you in the future!

Mastering Money like the financial gurus all agree, is a long patience testing process and is nothing like winning a lottery. In the coming days we will talk about the first baby steps of making money work for you rather than you work for money!

Till then listen to this wonderful song by Pink Floyd called "Money"!

Money, get away
Get a good job with more pay and you're O.K.
Money, it's a gas
Grab that cash with both hands and make a stash
New car, caviar, four star daydream,
Think I'll buy me a football team

Money, get back
I'm all right, Jack, keep your hands off of my stack.
Money, it's a hit
Don't give me that do goody good bullshit
I'm in the hi-fidelity first class traveling set
And I think I need a Lear jet

Money, it's a crime
Share it fairly but don't take a slice of my pie
Money, so they say
Is the root of all evil today
But if you ask for a rise it's no surprise that they're giving none away