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This post is originally on January 15, 2018 on Finance & Philanthropypublished.
Here is the first part - How to build wealth - with and without time - Part 1
Last time we looked at what happens when you don't save and live hand to mouth - or worse, take out loans to finance your lifestyle. Today we discuss how to build wealth. There are essentially two levers for doing this: The Reduce your expenses, and the Increase your income. In order to build wealth, your income must always be greater than your expenses.
Asset accumulation over time
First, let's work out how to build wealth in which the time factor plays a role. Essentially, it is about saving some of your income and then investing the difference in a high-yield way. The return should be> 2%, because this is the usual inflation rate, which reduces the purchasing power of your money year after year. This means that many products are no longer required as an investment, e.g. call money accounts that bring a maximum of 1% annually. The stock market (index fund or individual shares) is most often chosen as an investment.
Depending on the strategy, you get returns of 5 - 25% p.a. and wait until the compound interest unfolds exponentially. For example, let's take a look at what happens if we invest € 10,000 at 15% p.a. and save an additional € 10,000 annually:
The magical € 1,000,000 is reached after 20 years. With a more realistic return of 8%, this figure is reached after 29 years. With € 1,000,000 in the depot you no longer have to work and can still get one medium-sizedto lead a good life.
The more you can cover, the faster it can go. But you have to cut your expenses and limit yourself because you have to save. Alternatively, you can increase the revenue. With the preferred source of income - the classic work in which you exchange money for time - you have to live with many restrictions. Salary increases and changing jobs to get a better salary are capped. Unfortunately, at some point you will reach your limits in maximizing your income with this method. The maximum intake per day is also reached by a factor of 24 (because the day has 24 hours). At the same time, spending is reaching its limits, and you have to hold out for many years, even decades, until you have created a great deal of wealth. Over time, dividends will climb from € 100.00 per month to € 500.00. You keep working and do without the Starbucks coffee, because each € 1 could be worth € 1000 in 30 years.
Depending on how you know and are used to it, this approach can turn out to be very strenuous and unnecessary. And also frustrating. But the biggest problem is that you can Time factor Involves here and even lets them do most of the work. You have to be patient for decades before your assets reach a noteworthy value. Time means your life for 8% p.a. Even if you start at the age of 18, it will take a long time to build up the first million this way, but the youth is gone. In addition, you give the money to markets that you not control can. If you keep your money in an ETF DAX, you have no control over the decisions of VW, Fresenius and Allianz or Blackrock whose ETF you bought.
When building up wealth via the stock exchange, you combine your finite, never-to-return lifetime with uncontrollable factors over which you cannot influence, especially not as a small shareholder.
This method is not in itself the greatest evil, it would be even worse to stand on the side, do nothing and watch the money melt. However, one must urgently be aware that building up wealth with the stock market is not the right thing for everyone, but is only suitable for the following goals:
- You want to spruce up your retirement.
- You enjoy your work (swap time for money) or bring you other advantages (interesting task, contacts, ...)
- You live very frugally anyway and prefer to live a modest lifestyle,
- You want to retire a little faster than usual.
- You feel comfortable in the middle class and want to maintain this standard of living.
For everyone else, this method is not right. All other people have to bury their lifelong dreams for the youth with frugalism and the hardest possible saving. Unfortunately, I became aware of this when I bought semi-professional scissors a few weeks ago in order to save myself the hairdresser in the future. Or that I find myself calculating that my glasses will be cheaper in the long run than wearing contact lenses - although the thought of wearing glasses all the time really makes me uncomfortable. At the beginning of last year, I also cut my cosmetic visits, no more nails made and no eyelashes made, which was a total of € 100 additional fixed costs per month. Yes, I have now saved this money and it works hard for me on the stock market. And, of course, everyone but me doesn't care what I look like. Some say it looks stupid anyway. Because of me.
Of course, these are not my big dreams in life, but I am slowly noticing how I reach my limits because I am slowly realizing that this is no longer possible I am No, the glasses do not belong to me and were originally intended as a bridge because my eyes were very irritated for a while. Going without contact lenses for a few months or 1 year, okay. But when I think about sticking it out for at least 10, if not 20 or 30 years, I just get sad.
If you want a special lifestyle, exotic trips or (you can't even pronounce it) even a Ferrari or Lamborghini, that means with this type of asset accumulation: forget it. Until one is able to afford such a car, one is 60.70.80, the youth is irretrievably gone and actually the dream has come to an end despite the money now available. How many years can you enjoy great prosperity using this method before you die? Not very long. Does health still help at that age when you plan to go on a trip? The grandchildren are most likely to be happy about the inheritance and maybe one of them will buy the Ferrari? Who knows!
If you had invested $ 40 in Coca-Cola stock in 1919 (about $ 600 today, adjusted for inflation), it would have been worth $ 9.8 million in April 2012. This is mathematically and factually flawless, but how realistic is that in relation to our lives? Let us assume that the person would have been 16 (which is very young) when he invested it, that is, born in 1903. Not only that until then no cancer had to be defeated, two world wars somehow had to be survived and no other incidents For this result, the person must still be alive in 2012 at the age of 109. But if you calculate realistically, what do we have? Right, a dead multimillionaire.
When you meet people who have become rich through this method, you will find that they all old are. Similar to a job, the time factor plays the most decisive role. But since our time is limited and you get the money in the stock market uncontrollable Letting climes work is not the best solution, I think.
Some people know that and still want more. These are the ones who start to gamble.
These then operate market timing or play the lottery on the stock exchange in order to make big profits and massively increase returns. That is of course a possibility, after all the Bitcoin millionaires are springing up like mushrooms. The decisive factor here, too, is that what you are doing not control can. Here luck plays a big role in which horse you bet on. The odds may be greater than the lottery, but it's still a kind of game of chance with uncontrollable factors.
But Warren Buffett got rich with it!
Warren Buffett had his earliest business experience as an elementary school kid and started saving at that age. If you start at 5 and at the same time does it very well, maybe you really have a chance to be a millionaire by the age of 30. In fact, many are striving to generate returns like Buffett's, i.e. around 20% p.a. despite the recession and bear market. And Buffett, too, has calculated that he will reach his first million at the age of 35:
“While he was sitting on the porch of his friend Stu Erickson, Warren announced that he would be a millionaire at 35. For a child in the 1941 crisis-ridden atmosphere, that was a bold, almost simple-minded statement. But his calculations - and the book - told him it was possible. He had 25 years left and he needed more money. But he was sure he could do it. The more money he was able to accumulate in his early years, the longer that money could bring interest and the better the chances that he would achieve his goal. " (Warren Buffett - Life is like a snowball * by Alice Schroeder).
But tell me, when you start playing football at 20 or 30, do you think you can do it professionally and play in the World Cup in a few years? People who are professionals and very good at a field started their practice very early on, in other words, when they were children. These people gave up the weekend at the age of 11 to train in the club and get better and better. At the same time, these are ideally the children who have a special talent so that their progress should be faster than average. And one of those is Warren Buffett.
Another crucial difference is that Buffett always tried to To exercise control. He attended general meetings at an early age and tried to influence the companies in which he held stakes. Buffett was for decades obsessedTo increase money. He neglected his children and wife to turn to the stock market. His wife Susan Buffett even papered dollar signs in his room. No, the probability is very high that you cannot repeat what he did. Most likely there will still be someone who can top them at some point, but they will start their path at 5 and not at 35.
Taking the money to the stock market is not a bad idea in and of itself and can be too slow Lead prosperity. This is ideal if you want to retire a little earlier and maintain the middle-class lifestyle, or if you want to spruce up your retirement and be carefree in old age. On the whole, this method is not to be understood as asset accumulation per se for me, but as Preservation of wealth. It is essential that you deal with it in order to generate a constant passive income stream from your generated profits. That's why this blog will of course continue to be about the stock market. To assetsconstruction In my opinion, it is less suitable because it integrates time (i.e. your finite lifetime) as a decisive factor in a non-controllable environment. The space-time throws the mathematically perfect compound interest a line through the calculation.
"What do you need to make a fortune on the stock market?" - A fortune.
Next I would like to address the actual accumulation of wealth, which allows very large fortunes within a few years that can be carried on the stock exchange.
Greetings & a successful week,
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Sources:  UNSCRIPTED: Life, Liberty, and the Pursuit of Entrepreneurship *  The Millionaire Fastlane: Crack the Code to Wealth and Life Rich for a Lifetime! *  Warren Buffett - Life is like a snowball *
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