If I gave you a choice between receiving a million dollars in cash today, or giving you the option of receiving cent today, and double that amount every day for 30 days, which would you choose?
AT first, your gut reaction might be “Of course I’d want a million dollars Tony!”
But let’s see what happens if you chose to get one cent a day— because that, doubled over the course of 30 days, will earn you more than $10 million dollars!
This example is one of my favorites when I try to explain to others how “compound interest” works.
Compound interest is the principle that makes your money grow by allowing you to earn interest on the interest you’ve earned, over time.
So, when you send your money out to work for you, you are building your Freedom Generator.
But when you send the money that comes back to you out to work again, its accelerates your Freedom!
Once you’ve achieved financial security by paying yourself first (which is priority #1), committing to living within your means and protecting yourself from life’s ups and downs, you’re ready to then grasp this concept, and put it into action.
To better illustrate this point, I’ll offer you a couple of examples.
Let’s say you put $50 under your mattress every month you could save about $6,000 in 10 years. But by putting $50 into an investment account with a 7% interest rate could yield you more than $8,600 over the same time span — nearly $3,000 more than the mattress-stashing technique!
Or, let’s say we have a couple — Ken and Jen — who earn $100,000 a year and apply the principle of paying themselves first by putting 20% of their income aside into a savings account, with a return of 8% per year.
At the end of the first year, they have $20,000 set aside and at 8% it’s returned $1,500!
If they decided to pat themselves on the back for a job well done, and to spend the earned interest on a vacation to Thailand— which easy to do because everyone wants a treat for working hard — then they’ll be missing out on some major long-term financial benefits, namely the ability to have real freedom and never work again!
If Ken and Jen decide to reinvest that $1,500 money instead — in other words, put the first-year total savings of $21,5000 to work by letting the lump sum interest they earned accumulate interest, or “compound”— then in 30 years (if they continue to re-invest their earnings each year), they’ll be $2,223,087 richer!
IT goes without saying that if they simply spent all their interest on trips and treats, they’d have much, much less money — and freedom!
Thailand doesn’t seem so enticing now, does it?
So, if that vacation to Thailand (or another exotic location) is truly calling your name, there are other ways to save money, which we will get into another time. But using your interest to fund a trip or a new luxury car won’t help you build your Freedom.
The more freedom you achieve by making your money work for you, the more time you’ll have to actually enjoy vacations — and everything else in your life.
Dr. Tony is the co-founder of MindShift.money and the best-selling author of three books on personal and business finances. Having achieved Financial Freedom at 27, Dr. Tony believes that through Financially Fit Bootcamp and Cash Flow Cure everyone can get there. He has made it his life’s mission to help others live a life where their money works for them—not the other way around.