what is compounding wealth passive sources of income

What is Compounding Wealth?

Explaining how powerful compounding wealth can be one of the most difficult tasks for me as an investment coach. Getting good passive sources of income requires patience. Desperate investors tend to be short sited, always trying to see what they can make in 6 months or a year.  They don’t realize that the way compounding wealth works is that the first five years don’t look nearly as impressive as the following 5 years.  And those 5 years don’t look nearly as impressive as the five after that.  They walk away from something that will change their life because they can’t get rich overnight.  And they go back to something that’s guaranteed to leave them living paycheck to paycheck.

what is compounding wealth passive sources of incomePeople get excited over their 1% and 2% raises even though inflation is eating away from their spending power year after year.  In fact, that’s a good place to start since it shows the power of compounding wealth in reverse. Since inflation averages about 3% annual, here’s what your nest egg can look like over that time….

 

Year 1: $100,000.00

Year 2:  $97,000.00

Year 5:  $85,873.00

Year 10:$73,742.00

Year 20:$54,379.00

So even if you’re a great saver, you can see that at just 3%, your money’s spending power gets cut in half about every 20 years.  That’s why savers lose, and raises under 3% actually mean you’re moving backwards. It is not a good way to make your passive sources of income.

 

The Power of Compounding Wealth….

We now know that we need to beat 3% just to preserve our savings.  And in today’s markets, that’s tougher than you might think.  Right now bonds are paying less than that.  CDs have almost never paid more than that.  Stocks average more than that, but if you’re a buy and hold investor, you have to be comfortable with the volatility. Some years are going to be losses, and you have to be emotionally mature enough to sit out the down turn.  And if you’re in your senior years, being force to make withdrawals from a depressed portfolio can be detrimental to its recovery.

So we have a magic number.  The experts say it’s impossible.  We feel that it’s pretty easy if you know what you’re doing, and it is enough to take care of the average person’s retirement needs.  That number is 12 %.  At 12% ROI, not only will you make up for inflation, but you can better handle taxes in standard accounts, and you can see some sizeable growth within a career.  Let’s say you only have $10,000.00, and you plan to retire in 30 years.  Here’s what the math looks like.

 

Year 1: $10,000.00

Year 5: $17,623.00

Year 10:$31,058.00

Year 20:$96,463.00

Year 30:$299,599.00

 

Of course, that’s only if you never invested anything past the initial $10,000.00.  If you were to invest about $4,000.00 year between now and then, you’d likely be over the $1,000,000.00.

So make sure you figure out how you’re going to meet your retirement needs in the future.  If traditional investing isn’t going to cut it based on your rate of savings, you might need to think a little outside the box. Discovering viable passive sources of income needs innovative thinking. That doesn’t mean recklessly speculating.  But it does mean you should continue to educate the many less traditional methods of investing that have track record and consistency behind them.

If you’re looking for some alternative strategies to up your ROI, we have made that our mission. Take a look and see.

 

About The Author

herbertkoehler

I am a college drop out who found my passion as an investor. I love the many facets of finance, investing, and business. But even more than that, I love sharing what I learn with others.

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