Do you know what determines whether you will be wealthy or not? Or yet, if you’re wealthy, whether or not you’ll be able to manage and hold it?
There is a science and art to wealth and most of us are still trying to figure it out. I do not have the right answer, but I realized that that there is no one thing that determines one’s propensity to be rich. Well, being born into a wealthy family could be one inclination to continue in the wealthy paths if the wealth is passed down and properly managed. Sometimes the wealth is donated to organizations rather than willed to the children. Another inclination is to hit the jackpot. Short of these two, you’d have to work and make your money work for you.
In making your money work for you, one scientific way is to save or invest. Savings is less riskier than investing. With savings you’re guaranteed your money back, with a meagre extra. Except, of course, there is a bank run. I pray not. But with investing, there’s no guarantees – you can either lose it all or make large sums of extra money from it following a rule of finance of “the greater the risk, the greater the reward.”
But how do we save or invest? Consistently. Consistently setting aside a fixed amount is the key.
For how long? Forever. Excuse me, nothing is forever. Howabout holding for the long run, at least consistently for ten years. Better will be twenty to thirty years, and best for as long as you live.
This is the main secret of Warren Buffet’s wealth after his experience of selling his initial stocks too early only for the stock to quintuple. According to sources, Warren Buffet started investing in stocks at the age of 11.
Undoubtedly, Warren Buffet benefited immensely from the compounding interest (CI) over the long haul. With CI, your money multiplies exponentially. For example, if interest rate is 5% and you invested a $1000, the first year will be $1,050, (note: leaving the same amount in a savings account might only yield about $2-$5!), second year will be $1,102.50, third year $1,157.63, 4th year 1,215.51, 5th 1,276.28, etc.
The compound interest formula is P*(1+i)^n; where P = principal, i = interest rate, and n = number of years. You can plug the numbers on your computer or an Excel spreadsheet to calculate it.
Compare compound to simple interest using the same example of $1,000 at 5% for 5 years, the total interest will be $250.
The difference in this examples are not so great; $26.28. However, the larger the amounts invested, the higher will be the yields and thus become more meaningful sums.
The yields will also depend on if the rates are calculated annually, quarterly, monthly, or daily.
“It is science because investing is a process and art because of the manner in which it is executed.” –Brijesh Damodaran
Having the money is not enough. Our behaviors with money; how we view it, including our spending habits, whether we believe in savings, in taking risks or not, will also determine whether we hoard money, donate it, or just like to stare at it in our room, drawer, or safe. Unfortunately, some still don’t believe in keeping their money in the bank. Once the bank is full, do we go on a spending spree or start bragging about it? May God forgive us for either. These sums up our money attitudes and falls under the art of money. Our attitudes towards money is constant irrespective of our salaries or business revenues. Some folks wished they made more money. But I propose to you that it is not about making more, it is about efficiently managing what you already make.
The art of money management can be genetically-inherited or environmentally-acquired by learning from different sources such as friends, from work, or self-taught.
Like everything else, the art of money management (that is, our behaviors and attitudes) can be changed. We can reprogram ourselves if a particular habit is not working. May God help us all to see what areas of our money habits need to change.