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Sunday, August 5, 2012

Power of Compounding: Secret to Building Wealth

#1 Secret of the Wealthy

Getting Finance Especially if it is Cheap...

Mortgage is all about Using Other People's Money! (And then Investing it Wisely of course). Nb: Property investing is not so much about bricks and mortar but about getting finance (the ability to borrow). It's the only investment vehicle that allows you to leverage / borrow and to such a high level (ave. 80% LVR, loan-to-value ratio). Many a wealthy portfolio has been built on the backs of property investments. The concept is to hold the property until such time when it appreciates in value (usually 7-10 years)* before you sell (or hold very long term).  In the meantime you rent it out to cover your holding costs (mortgage interests, county taxes / rates, insurance costs, R & M, etc.).   

*Note that this scenario is more typical of markets that have not been distorted or manipulated artificially.

Your success will be determined by how well informed you are and by the decisions you make re eg. entry and exit prices, timing of entry and exit points in the property cycle and time IN the market, cost of finance, and other market conditions when you execute your decisions.  When these factors / conditions are (mostly) in your favour you stand to gain well...even outstandingly well as has been the case for many ordinary folks or mum-and-dad investors who have had no extra IQ, higher education, or even money to begin with in some cases. 

Watch Financial Advisor Ric Edelman's Interview by Oprah

You also have the advantage that over time your rents will increase. When you start to receive rental surplus once your overheads are covered by the rents, remember to plough this surplus back into your savings or retirement accounts (see video below) to put that money to work. Ensure there is no lazy money lying around.
If you have decided not to pay back that mortgage just yet ensure you don't squander the surplus rental cash you have generated from your property investments to get a double bang from your mortgage buck - hopefully your retirement plan is returning a higher yield than the cost of your mortgage (if you took one out when interest rates were very low and for a very long term). 
Also consider factors like cashflow, location, distance to cbd, employment trends in your state / city, proximity to public transport, quality of your property, rental pricing, demand and supply of rental stock, and other local factors that affect rentability because this is vital to your ability to hold your property for the long haul.
You want to hold for the long term to allow your property time to make decent capital gains, which will then increase your wealth or net worth. That's the number one reason why people invest - to increase wealth and in the case of property, the most usual route is via natural (as opposed to manufactured) capital gains.

The Power of Compounding - Secret to Building Enormous Wealth

The Magic of Compounding: When you invest money and you don't touch it, that is, you don't use the profits but REINVEST them back instead, find out what happens? Watch the videos below...

"The Power of Compounding - Secret to Building Enormous Wealth" Video:

Double a Penny Everyday for 30 Days - Illustrating the Power of Compounding

Albert Einstein - What is the 8th Wonder of the World?

The Principle:  Even the smallest amount of money (provided you don't touch the profits but plough it back into the investment while continuing to invest consistently, say, at $100 per month) although very slow in the beginning, will hurtle past its critical mass and achieve explosive growth in the latter part of its investment life due to the exponential growth path that such investment takes.  That is the magic of compounding over long periods of time. This is such a powerful process that you do not require huge returns, just steady moderate or even small returns over long periods of time will produce incredible results!  100 Ways to Create Wealth

 Note: 3 factors are at work here - consistency, discipline and the time factor:
  1. You must save or invest consistently (can be a very small amount)
  2. have the discipline to plough back the profits and not withdraw these
  3. have the discipline to do both consistently over a long period of time
to produce this miracle; it can be done. It's true. You can accumulate a significant sum without onerous effort and even after only 10 years you can see the massive amount that you have accumulated, say, even at $100 per month! Try it. The good news is it is a simple system, you don't need to watch and time cycles like some asset classes (property) and other considerations like 'buy or sell right', or provide collateral, incur expenses like mortgage fees, brokerage, etc. - just a straightforward system with low risk so long as you do not get enticed into high-return (ie. high risk, too-good-to-be-true, dubious) schemes.

Follow Warren Buffet's rules and stay safe!:
  1. Rule one: "DON'T LOSE CAPITAL!"
  2. Rule two: "DON'T FORGET RULE ONE!"
Traveling slow and steady in the Safe Lane is better than fast in the Lose-all Lane! The good news is your patience will be rewarded. After a while, the Slow Lane won't be so slow and will amaze you when you witness the power of compounding interest, where interest upon interest upon interest, etc. gets compounded indefinitely.

Slow and steady, and then not-so-slow and steady - wins the Race! Astound your friends and family - in Life it is not how you Start but how you FINISH ... that matters!

Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
Book by T Harv Ecker (highly recommended)

Book and Audio book by T Harv Ecker (highly recommended)

The author has attended Tony Robbins, Kurek Ashley, live on stage  and T. H. Ecker's Intensive and Dynamic Events.  His Books and LIVE Events espouse his Inspiring Teachings and are Highly Recommended!  The next events have been planned for November 2012 in Sydney and Melbourne, Australia  - Join us if you can make it, GO HERE:

PS: These events are not that commonly held; it's a privilege to attend so hope you can make it. Especially useful to those who are serious about achieving Big Goals and Dreams ... Faster!

Ultimate Property Entrepreneur & Investors Conference, Australia, 2012

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