What We Really Need To Know About Finance

Finance is such a broad subject it would be impossible to write even a general outline in a single article. Therefore, I will limit this article to being an introduction to personal finance. Let's call it - "A First Step to Becoming Wealthy."

In my book, "So, Who Wants To Be a Millionaire?" I discuss three keys to creating wealth. They are the core elements to understanding finance and wealth.

Three Keys To Creating Wealth:

Key #1: Sales Make the World Go Round

Money is generated when you sell something to someone else. For many people, this may be a little frightening. For some reason, many people are intimidated by the thought of having to sell something. Don't let it concern you. We are only talking about convincing people of your ideas and points of view – and you do that every day. In fact, you have been doing it since you were a baby! Even in your crib, you perfected the art of persuasion, before you could even speak — with a little giggle, and reaching out to whoever is peering in. Who could resist?

By the age of four, you had learned the salesman’s most important technique - persistence; "Please, Mommy! Please, Daddy, Please, please!" By seven, you were well on the way to being an expert in bargaining - "If I clean my room, can I then? Huh? Can I?" By the time you reached thirteen, you were combining these skills with logical reasoning - "I could mow our lawn, and Mrs.Brown's lawn and Mr.Joseph's lawn, and if I save the money and buy it myself, can I have it then?"

During your years as a teenager, you became even smarter. Now, after even more years of practice and experience, dealing with people at home, at work, friends, you have become highly proficient at negotiating and selling to people. You do it every day, whether it’s deciding where to go for lunch with co-workers, which movie to see, asking your employer for a raise, or solving a customer’s problem in your own business. No matter what your skill in that area, if you create a great deal of value for people, they will be ready to buy the product, service or idea you are selling. It’s the only way to increase earning power. And you are already an expert.

Key #2: Compound interest.

Compound interest refers to whenever interest is calculated, it is calculated not only on the original principal, but also on the interest that has already been earned. The way to make money increase is to invest it where it will grow undisturbed. Then, reinvest the profits to compound the interest the money is earning. You will earn interest on the interest.The more frequently interest is compounded, the faster the balance grows. In other words, you get paid interest on the interest in addition to interest on the principal. For example, at 6% interest, compounded monthly,

     Saving            $50 p.m    $100 p.m

      ————————          —————       ————— 

     after 10 years     $8,235    $16,470 

     after 20 years    $23,218    $46,435 

     after 30 years    $50,477   $100,953

In fact, saving $200 per month will give you $201,908 after 30 years, and $500 per month will give you $504,769 after 30 years. In this last example, the cost - the amount you actually saved - is $180,000, so you will have earned $324,769 in interest to receive a total of $504,769. Pretty good for doing nothing, eh? The effect of compounding depends on the frequency that interest is compounded and the periodic interest rate that is applied. Therefore, in order to define accurately the amount to be paid under a legal contract with interest, the frequency of compounding (yearly, half-yearly, quarterly, monthly, daily.) and the annual interest rate must be specified.

Key #3: Inflation.

Money loses value over time, because prices for goods and services rise, and, consequently, purchasing power falls. This means your money must grow if only to be able to buy the same things with it today that you could buy last year. Although inflation would appear to work against having money, it also means if you hold your wealth in things that are affected by inflation, they will likely go up in value — real estate is a prime example.

I am sure you can see that you already know these fundamentals. They are not secrets — it’s not rocket science — there is no trick! There are other strategies, of course, but they all flow from these basic principles, and once you have these keys firmly in place, you are on the road to becoming a Millionaire. They put you at the door of the Millionaire’s Mindset. Are you ready?