How To Get Rich Slowly

The best way to get rich slowly is by using compound interest to your advantage. This is probably one of the most important topics when it comes to wealth creation. 

Compound interest can turn anyone into a (multi) millionaire.

Compound interest separates the rich from the poor. Albert Einstein once said “Compound interest is the 8th wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

Compound interest is basically interest on interest. 

Consider these three scenarios:

SCENARIO 1
You save N100,000 every year for 5 years in a Halal (interest-free) savings account (or under your bed).

Your total savings will be N500,000.

What you keep is what you get.

SCENARIO 2
You learn that Awesome Bank gives 10% interest annually for saving with them. 

You have N100,000 you are not using and decide to save it for the next 5 years. 

Here, compound interest comes in play. The 10% interest is applied to the end balance of each year instead of the initial N100,000 deposit. 

Your total interest earned is N61,051. Your N100,000 has grown to N161,051

Not bad.

In 5 years, the initial deposit has grown by 61%.

SCENARIO 3
You learn that Awesome Bank gives 10% interest annually for saving with them. 

You decide to save N100,000 annually for the next 5 years because you are smart and disciplined like that. 

Because of the magic of compound interest, your total savings of N500,000 grows by N171,561 to become N671,561.

Do you now see what I mean when I say that anyone can become a (multi) millionaire, in this case within 10 years? 

Total investment grows by 171%

Why You Should Start Early

Let’s look at an example to show how saving early can positively affect your retirement investment.

Smart Ahmed decides to start saving for retirement with Awesome Bank at age 25.

He saves N100,000 each year in his retirement account until age 35. At this point, he stops saving and just let’s interest work its magic.

At age 65, assuming a 10% annual rate of return, he will retire with N33,649,922 even though he only contributed N1,000,000 total into his account.

On the other hand, Slow Ahmed decides to wait until he is 35 to start saving. He saves the same N100,000 each year that Smart Ahmed did but he actually continues saving that amount right up until the day he retires at 65.

His total amount contributed to his account over those 30 years would be N3,000,000. Assuming he also earns an annual return of 10% on his funds, he will end up with N19,903,777 when he retires. 

A difference of over N13 million

What kind of sorcery is this?

Even though Slow Ahmed contributed three times as much money as Smart Ahmed did, he actually ends up with over N13 million less at retirement.

The reason for this is compound interest and time. The sooner you start saving for returns, the sooner you can stop saving and let compound interest do it’s magic. 

How amazing would it be for you to save for only 10 years and then spend the rest of your life chilling, knowing that your future is taken care of?

What Does This Mean?

Instead of simply saving your money in the bank, put them to work. Yes, it’s okay to have an emergency fund in your account but what I’m saying is don’t make bank savings your primary and only means of saving.

The average returns Nigerian banks offer for savings accounts is about 4%. This is less than the average inflation rate of about 11%. In reality, by saving your money in the bank (or under your bed), you are actually losing money to inflation.

Think of your money as employees. When you invest in mutual funds, the capital market or your business, you are putting them to work. They will work day and night to create other employees that will work for you.

How Can I Go About It?

First, you need to have a plan. You might not care about a retirement fund now (which you should) but here are a few things I imagine you might care about within the next 10 years.

  • Your beautiful wedding (and that amazing honeymoon around the world)
  • Having kids (and giving them the world)
  • Travelling (because nobody likes a lazy passport)
  • Starting or expanding your business (because you want to be financially independent)
  • Having an emergency fund (because shit happens)
  • Spoiling yourself (because you deserve it)

I can’t ask you to create a 30-year retirement plan now since you’re most likely only getting started but you can start with a 5-10 year plan. The main questions to ask yourself here are:

  • Why am I saving/investing?
  • For how long? 
  • What is my target (amount)?

Once you have used the answers to create a goal, then you are ready to get started.

  1. Map out how much you need to save/invest each month/year to reach your goal (use the  formula in the tables above for your calculation)
  2. Determine where you can get the best, realistic, and legit rate of returns (typically 10-15% annually)
  3. Get to it right away. 
  4. Commit to it whatever comes your way. No matter how broke you get, NEVER touch that money until you hit your goal.

Getting Started

For now, here are a few trusted platforms to help you get started.

  1. CowryWise – an alternative to saving in the bank. You can earn between 10-15% interest by simply automating your savings.
  2. PiggyVest – allows you to save and invest. You can earn between 10-13% interest through saving.
  3. I-Invest – Treasury bills are the safest investments as far as I know. They are backed by the full faith of the government. I-Invest is the only app in Nigeria so far that allows you to invest in T-Bills. The only catch is that you need a minimum of N100,000 to invest via the app. 
  4. Treasury Bills via Bank – this is an alternative to I-Invest. You can get T-Bills via your bank.
  5. Money Market Mutual Funds – this is a low-risk investment. According to my research, these are some of the best low-risk mutual funds in Nigeria: 

(Options 1-3 are relatively new businesses which makes them risky. I recommend you do your research and consult a professional before making any commitments)

Join the mailing list to learn more about personal finance.


Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this:
search previous next tag category expand menu location phone mail time cart zoom edit close