Spending less than you earn is hugely important if you want to become free to live life on your own terms, but it won’t get you very far on its own. In this article, I’ll show you what to do next.
Back when I used to believe I’d have no choice but working a “proper” office job until I was allowed to retire with a state pension, I imagined how rich people managed to reach the lifestyle they had. I assumed that they had enough money to outlast all their spending – and still last them several lifetimes.
While that is true, rich people also make their money grow and generate passive income for them. They don’t even have to work because their money works for them.
What if I told you that you could save a certain amount of money, and guarantee that not only would it last you for the rest of your life, but that it would keep growing indefinitely so that you could pass it on to your family?
Making Money Work For You
The very first book I ever read on money was called The Richest Man in Babylon. Although it was written 90 years ago and talks about the money habits of ancient Babylonians, all of it is still very relevant today.
Through a series of stories, the book lays out several rules to wealth – or, in older English, a “fat purse”. In essence, it talks about the same as I do in this website; saving a part of your money and then making your money grow.
Let me use an example.
Iltani and Seluku (both common Babylonian names. That’s right, I always do my research!) are old friends, and both save 20% of the 100 gold coins they each earn per year. While Seluku is very conservative and doesn’t trust anyone with his money, Iltani knows that she can take calculated risks to make even more money.
After a year, they have both saved 20 gold coins, but Iltani decided to invest them into the business of an experienced shepherd, who guarantees to return the 20 coins she lent to him with an interest of 25%, or 5 extra coins. So while Seluku now has 20 safe coins, Iltani has 25.
Pretty good, but let’s see what happens after 10 years.
Let’s assume here that they both maintained their 100-coin salary and that, while Seluku has kept all his coins under his mattress, Iltani has made a 25% annual return on every business investment she has made.
The results are pretty astonishing. Iltani has more than tripled what she would have had she not invested. Not only that but, after 8 years, the income she makes from her investments surpasses her income at her job! She can keep investing in similar deals and live off the interest. Forever.
In fact, if she did just that, and stopped working and kept her expenses at 80 coins per year, after 20 years she would have a fortune of…drum roll please… 6,859!
At this point, I’m sure that Seluku would compare his 400 coins to Iltani’s success and wonder what he did wrong.
The Infamous Stock Market
Back in the 21st century. there are many ways to invest your money to make it grow. I will explain each of them in future posts, but my favourite is the stock market.
If you’re skeptical about it, I understand. The stock market has gathered a lot of bad press over the years, which is not helped by the image regular people have of it. A lot of people – even some of my friends and family – believe that investing in stocks is just a gamble and that nobody can predict what’s going to happen.
While that is somewhat true – it’s almost impossible to predict what the market is going to do tomorrow, or next week – the market always rises in the long run.
Here is a chart of the S&P500, the top 500 companies in America, through the last few decades.
As you can see, there are big dips – namely the dot-com bubble in the early 2000’s and the financial crisis in 2008. As bad as things get, things always go back to normal eventually. And then keep growing.
What about companies that go bankrupt?
I think most of you will know somebody who knows someone else who “lost their life savings in the stock market”. That’s probably true – if someone puts all their eggs in one basket and it’s a dud, they can easily lose everything if the company goes kaput.
However, no experienced investor – or anyone with common sense – would do that! If you’re anything like me, you’d want to investigate, read all you can about where you’re putting your hard-earned money and then decide to go for it, knowing that the odds are overwhelmingly on your side.
Later on, I’ll explain why it’s vital that companies pay Dividends, and how they can pave your way towards financial independence.
Do you invest in the stock market? Do you know of anyone who’s had a horror story with the stock market? Let me know in the comments below!