There are three key variables in shaping your plan for financial independence. For two of them, if you double the amount, without changing the other variables, the result for the total accumulated amount may just be double or even less. However, for the third factor, if you double, the result in your final equity is always more than double.
One of the most relevant factors in the construction of any financial assets is time, that is, the period considered in the construction of your reserve for financial independence.
Anxiety to see faster results makes many people neglect this variable.
To understand the importance, look at these two examples.
Investor Warren Buffett, now 92 years old, has a net worth of US$ 110 billion. At the age of 62, his net worth was close to $6 billion.
That is, he took the first 40 years of his career to accumulate R$ 6 billion and in just another 30 years he added 104 billion to his portfolio. Less than doubling the savings time, he multiplied his portfolio by 18 times.
This was only possible by accumulating compound gains over time.
Many complain about not having accumulated anything for ten years or having to save for twenty years. Warren Buffett has been accumulating wealth for over seventy years.
The investment period is the main reason for Warren Buffett’s fortune. If he had stopped earlier, he would not have reached this heritage.
Other investors who had better returns than Buffett, but who stopped early, don’t own even 10% of what he owns. For example Peter Lynch.
See this other simple example.
Consider that you start from scratch and save BRL 1,000 per month, at a real interest rate of 0.5% per month. Note that I am using real interest, that is, above the IPCA. Thus, we will have all future values in today’s currency.
This rate can be achieved by investing in IPCA-linked CDBs or government bonds.
With this savings, at the end of ten years, you will have accumulated R$ 164 thousand at today’s values. Surely no one intends to spend seventy years saving. But if you keep that savings for another twenty years, that is, thirty years in total, you will have R$ 1 million.
Therefore, increasing the savings time by three times, that is, from ten years to thirty years, his portfolio was multiplied by 6.
Wanting to achieve financial independence fast or retire early is a majority wish. However, remember that your best ally in saving money is time.
The longer the savings time, that is, the sooner you start, the easier it will be or the less savings commitment you will have to make to achieve the same goal.
The second best alternative to starting early is to start now. Don’t put it off any longer.
Michael Viriato is an investment advisor and founding partner of Investor House.
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Book: The Journey to Financial Independence
Understand how you will achieve your financial independence
Living on an income is the last step on the journey to financial independence
These are the biggest questions about the journey to independence
Chapter 1 Construction of the plan
The first step in building the blueprint for financial independence
How to define the rate of return in your plan for independence?
Find out what assets you need to achieve your financial independence
On your journey to independence, don’t overlook the importance of this factor.
Understand the two ways I applied to increase my savings capacity
If you double this factor, your equity can multiply much more.
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