We have all heard that we should start saving money as soon as possible, due to the fact that the earlier we start, the more we will have later in life. Now, while this is absolutely true, the question is, why? What is it about putting money away long term that can turn hundreds into millions? The answer is compound interest.
The math and concept behind compound interest is easy enough: it is based on stuff we learned in middle school, and, just because we are now dealing with money, does not have to become much more complicated. The process is simply this. Let us say you put $100 into a bank account (a CD, for example), paying you 5% annually. At the end of one year, you would now have $105 in the bank, so the second year you would be earning 5% on that $105. At the end of year two, therefore, you would have $110.25 (got to by taking 5% of the original $100 - $5 - plus 5% of the additional $5 – 25c). Year three, that would have grown to $115.76, year 4 to $121.55, and so on. So, what does this look like long term? After 10 years, that same $100 would be worth $162.89. After 20, the result is $265.33. After 189 years, your original $100 would be worth over $1M (finally).
Now, obviously, becoming a millionaire in 189 years time is not that exciting. What is exciting, though, is the results we can get by changing some of the numbers, because compound growth is exponential growth: it takes a little time to get going, but once it does, watch out!
So lets run the same example, but play with the figures a bit. Lets say that, instead of just investing $100, you went through your chart of expenses (if you need this, email us at mailto:email@example.com, and put “Chart of Expenses" in the title), and were able to find $1 a day - $30 per month, to invest with. And lets say that all you did was invest this in index funds. (An index fund is a fund that basically mirrors market performance: depending on what you choose, you essentially own a piece of every stock on the market). Index funds have historically grown at 11% (mutual funds, by the way, typically under-perform this – at least about 80% of them do – so when people encourage to just “put your money in mutual funds" remember that you are, generally, paying for sub-standard service - yuck). That $30 per month would grow into $1M in just 53 years - much more exhilarating than the 189 above!
At this point, you may be saying “But I don’t want / don’t have 53 years to do this. I want to be a millionaire sooner than that, and have money to spend on the way there". So let’s say that you followed the steps of the Artists’ Prosperity System), went to work, and you are now in a place to put away $100 per month. Let’s also assume that you did your research, and went after more aggressive investments – direct investing vs. “park and pray" – so that your returns were 20% annually. At this rate, you would become a millionaire in 27 years – well within reach of any of us. And that is still only putting away $100 per month! How about a $1,000 per month? That will turn into $1M in 14 years. $2,000 per month? 11 years… You get the idea.
Now, those numbers may seem like a lot, to some of you. If you are caught in the throws of struggling to pay the bills, put time into your artistic career, and juggle all the other things you want and need to do, an extra $100 per month seems a lot to come by. That is where education comes in. Learn how to put money away, fore-cast, pay down some debt, and increase your income. Then, as your career takes of, and your business flourishes, can you see putting that $100 a month away? Then the $1,000? And the $2,000? More? It is extremely doable. All it takes is education, and a little time.
Our hope is that everyone will read this and be inspired to take action about their finances. Be it putting $30 a month into index funds (fool.com is an excellent resource for stock info, allowing you to paper trade etc while you get yourself comfortable), or taking our Artists’ Prosperity Boot Camp, and eventually branching out into Real Estate, Tax Liens and Oil & Gas, the key is action! What are you going to start doing now that will mean life will be different for you two, five or ten years from now?
There will always be people who will question our advice, who think that investment gains of more than 10% are impossible etc (although they should ask Warren Buffet about that). I am sure, in the same vein, that there were people who questioned your choice of pursuing the arts (I know there were plenty of those for me!) I want to leave you with this quote, again from The Motley Fool, because it sums up the choices we have as we go through our lives: “The least mentioned, biggest risk of all is not taking enough risk". In a country where 90% of people die poor, compound interest can mean you are one of the 10% who doesn’t. Understand it, examine it, research it… then get out there and put it to work for you!
Adam Martin is an active Assistant Director (most recently on “Transformers", to be released summer 07), Producer and Director based in Hollywood. With his wife, Miata, he also started Abundance Bound, Inc, (Abundance Bound - Financial Education and Planning for Actors & Artists ) and their mission is to develop a community of artists able to pursue their creative goals free from the crushing weight of financial stress. Adam and Miata are coached by Loral Langmeier, author of the best-seller “The Millionaire Maker", and apply what they learn with her to their clients within the artistic community.