Over the years, I've received many emails from young readers that they want to learn how to start investing. Most will want to invest because they want to make more money or think it will make them rich. I too started with this mindset but I've come to realise that if we really want to grow our wealth, investing should not be the main focus. What should we focus on instead?
Should we focus on budgeting and saving? If we think about it, how much can we save if we scrimp on that $10 a week? Let's do some simple calculations, $10 a week is $40 a month which is $480 a year. That isn't a lot of savings indeed.
How about investing? If we can get 10% return on a little savings of $10,000, it is $1000 a year. Is this a lot of money? Furthermore, 10% investment return is quite a lot and not easy to sustain for the long term.
Don't get me wrong. I'm not saying that budgeting and saving or investing is not important. It is important but there is one key factor which will make budgeting and saving and investing much easier. This key factor is INCOME.
Why is income important? A person who earns $1000 can never save $1000 but a person who earns $5000 can easily save $1000 or more. The more income we have, the easier it is to save money without compromising too much on our lifestyle. A larger savings for investment will make a big difference on our returns on investment. If we invest $100,000, 10% return is $10,000 a year. This is a significant sum of money. Let's compare a person who has $10,000 investment capital vs a person who has $100,000 investment capital:
Assuming person A and B both invest and compound their money at 10% yearly, at the end of 30 years, person A who started with only $10,000 has $158K while person B who started with $100,000 has $1.58 Million. This example shows that our investment capital makes a big difference.
With this, rather than just focusing on investing, wouldn't it be important to focus on our income as well? The more income we have, the easier it is to accumulate a bigger investment capital assuming we are prudent with our money.
The first $100K savings is important. As seen in the calculation above, a person who has $100K compounded at 10% would have 1.58 Million. Even if its just 8%, it would also be close to a Million dollars in 30 years time.
