Understanding Simple Secrets of Wealth Accumulation
Back in the late 19th century and early 20th century, circuses and carnivals traveled the country, each touting “marvels” that would draw crowds from miles around. Sometimes they were death-defying tricks that would leave the audience breathless. Other times they were magic acts that baffled the townsfolk. The reality of many marvels, however, is that they’re not so incredulous once you understand their inner workings—they simply make sense. The same holds true of what many regard as the three marvels of wealth accumulation:
While these can supercharge your financial future, they’re not really marvels at all. Like the concepts of lift, thrust, and drag in aerodynamics, these principles have always been around, but not necessarily understood. Once you grasp the power of these three marvels, you will readily see that just as lift, thrust, and drag make planes fly, these three concepts can help your finances soar.
For a bird, airplane, or any other object to fly, four forces all play a part:
Weight is the natural force that pulls a plane toward the earth. To fly, you must overcome weight (or gravity) with an opposing force (lift). In finance, I compare weight, or the pull of gravity, to taxes and inflation. To gain altitude, you must overcome the forces of taxes and inflation.
Lift is the force of air flowing over and under the wings of a plane that acts on the wing to move it upward. I compare lift to the power of compound interest. The difference between simple and compound interest can be the difference between paying hundreds of dollars on a simple interest, declining balance that may be tax-deductible (as in an amortized mortgage), versus separating those thousands of dollars so they can climb exponentially in a side fund with compounding interest. Thanks to the power of compound interest, you can move forward more quickly than you may think. You can even become your own banker by doing what banks and credit unions do to amass wealth—borrow money at a lower rate and invest it at a higher rate.
Thrust is the force created by the engines and propellers that pushes the plane forward. In order for a plane to fly, the thrust force must be greater than or equal to the drag force. I compare thrust to the power of tax-favored accumulation. Tax-deferred accumulation is a powerful propeller engine, but tax-free accumulation is like a more powerful jet engine. In my Missed Fortune series of books, I explain approaches that allow you to use 100-cent dollars on the front end, let the funds accumulate tax-free, and withdraw 100-cent dollars on the back end (at retirement). This type of approach can save hundreds, thousands, sometimes millions of dollars of tax, and can last into perpetuity. Compare this to a traditional IRA or 401(k) that will become depleted in ten to fifteen years based on the same retirement income stream.
Drag is the force of resistance caused by the body of the plane that slows down its thrust, or forward motion. It’s the most misunderstood principle, both in flight and in wealth accumulation. I compare drag to the power of safe, positive leverage—using Other People’s Money (OPM), such as a loan or a mortgage from a bank. To make your wealth take off, you need something that most people think of as “a drag” (in the slang definition of that word). That something is paying interest. “Drag” in my vocabulary is good and vital to wealth accumulation.
If you’re serious about increasing financial abundance, it’s important to understand how to apply these marvels, or principles, so your money can work for you in bigger and better ways. This can empower you to enjoy more of life—and pass the knowledge and means along to your heirs—so your loved ones can thrive into perpetuity.
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