This weekend I met someone who recently won the lotto. This was great because she is one of the nicest people that I know and if anyone deserves it, she does. The downside is a community, especially South Los Angeles, Watts, that sees someone win the lotto may now think that the lottery is a worthwhile investment. As a result, the community gets drained of its resources because one person made it look like it is possible. “The lottery is a tax on the poor”.
This post should shed light on the true value of investing. There is a misconception out there that the stock market is gambling. This idea leads people to believe that a small investment will ultimately balloon into a large fortune like a lottery ticket. This could not be further from the truth. If you drop a few dollars in the stock market like you would if you bought a scratcher the odds are that you aren’t going to hit it big. In fact, you might lose it all. However, the failure of the ‘a lot for a little’ premise does not mean that investing is not lucrative. Investing allows you to grow your wealth through 1) forced savings, 2) compound interest, and 3) developing the millionaire mentality.
Savings is the cornerstone of all wealth. While you can’t get rich investing in a savings account, I would argue that you can’t invest until you first carve out some money that you are willing to put aside. The problem is that most people equate savings to sitting. I think that you can and should save by investing at the same time.
The purpose of savings is to avoid spending everything you earn and to set it aside. If you take a portion of all that you earn and set it aside it shouldn’t matter where you put it… so put it in a brokerage account and make it work for you.
‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’ For a while I never grasped what compound interest was because the people who explained it didn’t do such a great job. My goal is to actually make sense of it. One definition is that it allows you to make interest on your interest. For example, if you have 100 invested and earn 10% then after year one you will have 110. After year two you will have 10% on the 110 which would be 11 dollars not 10 because you now have a greater principal balance.
What this principal fails to consider is that your total will be $121 so your total gain is actually 21%. When I heard this my mind was blown. Compound interest is great because it allows you to make money on the SAME money. So your 100 bucks sitting for two years earns 21% and after three years its 32% and on and on. That is when I realized the true value of compound interest.
Compound interest is a great principal but there is also value in what I call “compound principal“. Most people who invest tend to want to drop money in and wait… This works, but I think that the better strategy is to invest while adding to what you have. This allows your principal to grow while you average in your cost basis when you purchase more shares and grow your principal balance.
The true value in investing comes from making the big plays not from investing small and praying for growth. The gains on top of your ever accumulating principal will help you get there and they will beat inflation but don’t sit around and wait for it to happen without adding to it. Be proactive. Nothing great comes to those who wait. Waiters and hopers just end up with the leftovers that the hustlers didn’t care to take. The good book says that faith without works is dead. Don’t just invest and sit on the sidelines. Invest and invest and keep doubling up while your gains do the same.
Rich people see every dollar as a “seed” that can be planted to earn a hundred more dollars, which can then be replanted to earn a thousand more dollars. This statement might contradict the title of this post but we have to focus more on the action of planting your money not in what happens after. The main take away from this is using your money as a seed and then expecting a harvest. If you never plant you cant expect a harvest. Most middle class and lower income people never plant and for that reason they will never become rich. This paradigm shift is necessary to advance the culture. Focus on the planting and the harvest will come.
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