The Power of Compounding
Whenever I travel around the world speaking and teaching, I always run into the same question, “What’s the secret to becoming wealthy?” I’ve found there is no secret. Instead, it is a way of being. And this requires constant growth and reorientation.
Ayn Rand said, “Money is a tool. It will take you wherever you wish, but it will not replace you as the driver.”
One of the most common reasons people give for not investing is, “I don’t have the money.” This illustrates a common misconception many people have that money makes money. People make money. Wise investors use money as a tool—it can be their money or someone else’s money—to invest and generate returns on the money invested.
Unfortunately, as many people have experienced, simply having money to invest and investing it often leads to loss of money. To be a successful investor you need to be educated about your investments and take control of your investing.
Several years ago, there was a study done of rich and poor all around the world to find out how people born into poverty eventually became wealthy.
They found that they maintain a long-term vision and plan, they believe in delayed gratification, and they use the power of compounding in their favor.
Albert Einstein was amazed at how money could multiply just by the power of compounding. He considered the compounding of money to be one of the most amazing inventions.
This study took compounding beyond just money, however, and found that knowledge and learning gained from each baby step, each little success and failure, also compounded over the years.
People who took no steps at all did not have the leverage of a magnified accumulation of knowledge and experience that comes from compounding.
Much like the good habits and learning that happens for those who become wealthy by using compounding, those who have poor life and financial habits compound those habits over time. This abuses the power of compounding and leads to long-term debt instead of long-term wealth.
I find these types of people want the quick answer. They want me to tell them what to do to acquire great wealth, but they need to understand who they must become first. In other words, too many people are fixated on the get-rich-quick philosophy of life.
Financial intelligence is also emotional intelligence. Warren Buffett, the world’s richest investor, says, “If you cannot control your emotions, you cannot control your money.” The same is true for your process.
Many are desperately seeking short-term answers because they have money problems today caused by consumer debt and lack of investments due to their uncontrolled desire for immediate gratification. They have the lifestyle of, “Eat, drink, and be merry.”
It’s all about education. The more you know, the better you’ll do when it comes to investing. This means that you’ll need to do some homework. The good news is that with the Internet, there are plenty of resources right at your fingertips.
One of the toughest parts of my process was not quitting when I was depressed, not losing my temper when I was frustrated, and continuing to study when I wanted to run.
Another reason many people fail in their process is they cannot live without instant gratification.
The main reason I mention the low pay I received at the start of my life was to illustrate the importance of delayed gratification. Many will sacrifice a richer tomorrow for a few bucks today. I did not make much money in my 20s and 30s, but I make millions today.
In other words, emotional intelligence is essential to financial intelligence. I would say that when it comes to money, emotional intelligence is the most important intelligence of all. It is more important than academic or professional intelligence.
Start Small, Dream big
In 1989, Kim’s first investment was a $45,000 two-bedroom, one-bath home in Portland, Oregon. She put $5,000 down and made $50 a month. She was extremely nervous when she took her first step. Today, a $17 million apartment house is boring to her. She is ready for bigger projects.
In 1997 Ken McElroy started with a two-bedroom, two-bath condo in Scottsdale, Arizona. It cost $115,000, and he put down $23,000. He made $50 per month in cash flow. Today, he controls a real estate portfolio worth hundreds of millions of dollars.
I bought my first investment property in 1973. I had no extra money to invest. I was still in the Marine Corps and had just purchased my first home.
Rather than let low pay and no money stop me, I signed up for a real estate investment course for $385. Within a few months, I purchased my first investment property, a one-bedroom condo on the island of Maui, for $18,000.
The property was in foreclosure, and the bank was desperate to get rid of the unit. The bank let me put the $2,000 down payment on my credit card. The property made me about $35 a month after paying my mortgage and credit card.
This is why I recommend that people start small and stay small, as they allow their financial intelligence to increase. With an increase in financial intelligence, their returns on their investments increase.
If you start small in the S quadrant and learn the skills to be a successful entrepreneur you can then decide to move on to the B quadrant and then to the I quadrant. Or you can stop and start your own business.
Some may find that moving into the S quadrant proves to be too challenging. While anyone can be an entrepreneur, becoming an entrepreneur is not for everyone. Today, real estate brokers continue to say to Kim and me, “You can’t do that.” They say that even though they see us buying 300- to 500-unit apartment complexes with debt and making millions tax-free. Most real estate agents can’t do what we do because they were educated in the S quadrant, rather than the I quadrant.
Since debt can be lethal, we recommend you start small. Buy several small deals, as Kim did when she bought her first 20 units. Learn how to manage debt and manage real estate.
No matter how much money you have, start small. Invest in many small deals, practicing to gain experience in managing debt, property, and tenants. Once a banker knows you have experience and a successful track record, they will lend you as much as you can handle.
Editor, Rich Dad Poor Dad Daily