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Many go on to college where theyll spend another 2,000 or so hours studying a specific subject in preparation for a rewarding career.
If we were to stop each graduate as they stepped off the stage and ask them the question, Whats your biggest goal in life? chances are the most popular answer would be, To make a lot of money.
Although this kind of wet-behind-the-ears answer may lack the seasoning of maturity, its hard to overlook the fact that - intentionally or not - schools simply fail to teach financial literacy.
What about the economics classes? Nope, most of what you usually get is just a bunch of academic mumbo-jumbo thats entirely useless to all but a handful of policy makers.
Is it any wonder why the vast majority of us dont understand the basic principles of money and wealth?
Why are so many people are living paycheck to paycheck? Why has consumer debt spiraled out of control? Why arent you happy with your own financial situation?
Well, the answer goes deeper than just an economic downturn or the transition from The Industrial Age to The Information Age.
While many people are currently facing tough financial circumstances, there are also those who have become even wealthier during these uncertain times.
These people arent any smarter than anyone else, but they do understand something that most everyone else doesnt: the difference between earning money and creating wealth.
They understand and use the following three wealth-building concepts that arent taught in school, but should be:
Wealth-Building Concept #1: Leverage
Leverage is being able to do a lot with a little. Within the context of creating wealth, it means leveraging financial resources to get better than average results.
Truly understanding how this concept works is what separates the poor and middle class from the wealthy.
If youre currently trading your time for someone else's dollars at a job, you can only exchange about 14 to 15 hours a day. And since time = life, youre literally selling your life to someone else.
One of the most popular ways to leverage your time is to become a business owner and multiply your efforts and profits by having other people work for you.
The other way to leverage your time is to be an investor or a trader someone who uses money as leverage. Most financial institutions and businesses have been using O.P.M. (other peoples money) for centuries.
Think about it:
Your bank and credit card companies make money with your money
Your insurance company makes money with your money
And your mortgage company makes money with your money
The good news is, you too have the same opportunity to make money just like these guys do when you apply these wealth-building concepts in your own life.
Wealth-Building Concept #2: The Rule of 72
You may already know how The Rule of 72 works, but what Ive found is that most people who have heard of it dont really remember what it says (which means they probably arent applying it), or a larger segment of the population has vaguely heard of it, but they dont have a clue about what it is.
The Rule of 72 is a very key financial concept that says that if you take the number 72 and divide that by the interest youre getting on your investment, the answer to that equation will tell you how long it takes for your money to double.
For example, if your money earns 6% per year in a mutual fund and you have $10,000 in that account, it will take you 12 years to double that money (72 divided by 6% per year = 12 years).
Im sure youd agree, thats a really long time to wait. However, time isnt the only thing you need to contend with because you must also find a way to combat the silent wealth killer of inflation.
According to the Bureau of Labor Statistics, the average annual inflation rate over the past 20 years has been 3.24%. In other words, you need to be earning at least 3.24% per year on your investments just to keep up with inflation.
If youre starting out in your early 20s, then youve got time on your side, and by using the next wealth-building concept Im going to cover, you can still grow a large nest egg even with smaller annual returns.
But as a general rule, long-term investing works best when you either have a lot of money or you have a lot of time. If youre lacking in either one or both of these areas, you need other investment vehicles that are more aggressive to help you accomplish the same end result.
That certainly doesnt mean that you should allocate all or a large portion of your available investment capital into higher-yielding investments, but you do need vehicles that allow you to apply The Rule of 72 aggressively in order to get higher returns.
Wealth-Building Concept #3: The Magic of Compounding
Albert Einstein once said The most powerful force in the universe is compound interest, yet very few people actually understand or completely comprehend what it means.
So here are a couple of scenarios showing how simple vs. compound interest plays out long-term:
Wealth Strategy #1: Your great-grandfather invested $100 in 30-day T-bills (or the equivalent) on December 31, 1925, and always rolled over all proceeds into 30-day T-bills. 78 years later, that $100 would be worth $1700.56 big whoop, right?
Wealth Strategy #2: Your great-grandmother invested $100 in large stocks (the S&P 500 portfolio) on December 31, 1925, and reinvested all dividends in that portfolio. 78 years later that $100 would be worth $199,200.80 BIG difference.
This example illustrates the amazing power of compounding. The safe rate of return in T-Bills pales in comparison to the second example where the profits were compounded over the same amount of years.
All of these financial concepts are vital to your success. Trying to build wealth without them is like driving a car with worn out parts. The car might still run and eventually get you to where you want to go, but it wont be as fast and efficient as it could be.
