Continuing with thoughts regarding a new year … and a new start. Proverbs 13:11 is a very brief verse yet contains both a warning and literally a secret mathematical formula for financial asset growth:
Dishonest money dwindles away, but whoever gathers money little by little makes it grow.
Remember that Solomon’s wisdom is general guidance – not prescriptions that will always occur. So, when he writes that dishonest money dwindles away, he is indicating that when money is obtained improperly – which can be such a temptation – that eventually, it will disappear, likely through mismanagement or investing it in other ventures that go bust. In other words, those who live a lifestyle of trying to get money in shady or even illegal means will eventually lose that money as this type of investing rarely pays off in the end.
So … if that really is true, then what is the right way to build financial resources? Buried in the latter part of this verse is the answer: whoever gathers money little by little makes it grow. On the surface, Solomon is simply saying that if one takes their time, invests consistently, not looking for that one big hit, that over time, the balance will grow through careful selection of honest investments. But under the surface, there is a beautiful and encouraging methodology called compound interest – a modern-day concept with roots going back thousands of years to Solomon’s teaching. So great is the power of this concept that Albert Einstein one wrote, “compound interest is the greatest mathematical discovery of all time … (it) is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” So maybe you ought to pay attention to this!
In simple terms, compound interest is the money you earn on money/investments that are already earning money. Say again you say? Here’s a simple example: You put $100 in the bank earning 10% (don’t worry about banks not paying 10% these days … understand the concept). At the end of one year, you will have $110. But … if you leave the money in the bank for another year, you will be earning 10%, not on $100 but on $110, resulting in a balance of $121. Compound interest has earned you an extra dollar. And, as time goes on (remember, I mentioned consistency above), you earn more and more extra dollars.
Still doesn’t seem like much? Using that same 10% rate – which by-the-way is the long-run average return for the stock market – and investing on average just $5/day (that’s about $150/month or $1,825/year) for forty years, you would have set aside $73,000. However … guess how much your investment balance would be? Almost a million bucks ($988,700 – see the amazing graphs in chapter 2 of the book)! Compound interest – letting your money grow “little by little” has added a whopping $915,700 to your $73,000 you actually set aside! All it took was time and consistency. And what if you could delay spending and set aside $10/day … or $25/day? I think you get the point.
So, God’s Word is not only relevant to our lives, it provides timely guidance even though it was written thousands of years ago. Can you afford to set aside $5/day? If you don’t, what will you likely have to show for that $73,000 frittered away, day-by-day? And to make it easier, many of you could have the money taken directly out of your paycheck by your employer and invested for you – just like your taxes are taken out – and you will never miss the money. But you will have a great time watching your money grow “little by little.”
Finally, it’s not really about the amount you set aside consistently – it’s the concept. Whatever amount you set aside, and whatever the interest rate, if it is done consistently over a long period of time, it will grow magically into huge amounts. So, heed the age-old Biblical advice and gather your money little by little. It’s still only January – get started NOW! If you need further advice, don’t hesitate to contact me at mike@BibleBasedFinances.com.