Creativity. Credit. Compound Interest.
I was looking for an image for Compounding and this is what the curation engine of Pixabay gave me. But I think it’s wonderfully relevant to the discussion I wish to engage in below.
A compound eye (depicted in the image above of an average house fly) is a visual organ found in arthropods such as insects and crustaceans. It may consist of thousands of ommatidia, which are tiny independent photoreception units that consist of a cornea, lens, and photoreceptor cells that distinguish brightness and color. Compared with single-aperture eyes, compound eyes have poor image resolution; however, they possess a very large view angle and the ability to detect fast movement and, in some cases, the polarization of light.
Flashback to when I was 21.
I was just out of college, living just above the poverty line; with my mother and younger brother, ready to enter the job market. We lived in a small city in a poor third world country. I was average in intelligence, average in height; below average in weight and strength, and a vanilla looker. My relatives and friends were kinda out of my league. They had a lot more confidence, cash, and curb appeal than I could ever muster no matter how hard I tried.
So when I projected my future growth curve it did not look that curvy.
The only thing I felt bullish about was my creative brain. That was my gift from mother nature. It was like the house fly’s compound eyes- Not very clear/or good-looking but it had a large view angle with a lens for detecting invisible opportunity.
So guided by an unseen hand, I decided that I was going to take a risk and try and make my fortune in a foreign country where I could generate better odds for myself using my creative brain. Long story short, I got myself a job in Advertising and then Marketing in London and that has proven to be highly lucrative in giving me success and wealth over the last 20 odd years.
Now you have to find your own `Thing’. But make sure it is something that triangulates what you love, are good at, and can make you money.
That is the first C of getting wealth.
The second C is Credit.
You see, back when I was living a self-pitying student life, the thing I did not factor into my plans was the ability to get Credit from the market. At that time I did not know it but I was missing a fundamental leg of the wealth creation stool- Using my earned income to get credit from the market. Which allowed me to earn from two sources. Income from my employer and debt leverage from my lender.
I also did not factor in something else. That with this combination of Credit and Money, I could buy financial assets that I could not afford with my income-generating money alone.
As Ray Dalio wisely says in this brilliant YouTube video on the economy,
Credit is the most important part of the economy and probably the least understood. — Ray Dalio.
My asset of choice was real estate because as my wife says, “honey, you can’t live in a mutual fund.”
We took a long-term view and decided to use all our creditworthiness due to our incomes from our well-paying jobs to invest in real estate. We lived frugally and invested aggressively in real estate over a 15-year term.
We kept a Debt Income ratio of under 20% over this time and kept paying off debt or refinancing debt for the lowest interest rates along the way. We also rented the real estate assets and started generating income that became an additional source of income from assets that have been slowly appreciating in capital value over these years.
So if you want to become financially independent and enjoy buying, lovingly renovating, and renting houses, you should learn how to use credit to leverage real estate. Do this in addition to your job/ side hustle. It will make you rich.
The third C is Compound Interest.
Most great fortunes are built slowly. They are based on the principle of compound interest, what Albert Einstein called, “The greatest power in the universe.”
As a concept, it is quite simple.
It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest.
I have linked a Compound Interest calculator here. Play with it to see the power of compounding.
Just taking a hypothetical example; if you can put just $500 away monthly into an S&P 500 E.T.F (e.g. from Vanguard) that earns an average of 6% per annum, over 40 years- you will earn just over $ 760,000 in interest, on a total lifetime capital investment of $ 240,000- and making you a Millionaire!
I use this illustration because it shows, how a small, regular, investment habit can make you a Millionaire with a just quarter of your own money.
My point here is again that Compound Interest, like Credit, can become an additional source of income that grows exponentially if you can make it a healthy habit.
Compound Interest is a force of nature that you have to use if you want to become financially independent.
I am no expert at finance or real estate. I am your average nobody who has patiently used the power of Creativity, Credit, and Compound Interest to achieve financial freedom in my 40’s. I can afford to live a simple but free life on my terms. That is more than I deserve and I am forever grateful for it.
If there was one message I want to send back to my 21-year-old self, doubting his odds of making it- it would be `don’t worry kid, you’ve got this.’
Wealth is easy if you make it a habit.