Three Things I Wish I Had Understood About Money Long Ago

Although experience may be the best teacher, it's also the most expensive – especially in matters of money.
It's far cheaper (if not always as effective) to learn from others' experience, insight, and errors.
What follows are three essential money lessons that I wish I had understood long ago. If these might help you (or someone you know at an earlier stage in his financial journey)… well, that's time well spent.
     1. What will this expense be "worth" years from now?
My friend and colleague Peter Churchouse has a fantastic story that illustrates what I mean. Here it is in his own words:
Not long ago, I bought a 10-year-old Jaguar in Hong Kong, where I live. I paid roughly $6,500 for it…
The first owner paid roughly $100,000 for this car, back in 2005. So I paid nearly 94% less than the original purchase price…
Buying a new car – in high-priced Hong Kong or anywhere else – is almost always a terrible investment. Depreciation from the second you drive it off the lot is the name of the game.

However, there's another side of this story. He explains…
In early 2006 – that is, a few months after the original car owner in question bought his Jag – I purchased a small investment property in Hong Kong. I paid approximately $180,000 for a little one-bedroom walk-up flat in Central, Hong Kong.
I took out a 50% mortgage to buy it, so my down payment after stamp duties, agents' fees, and other expenses was roughly $100,000. I could have bought myself that brand-new 2005 Jaguar – but instead, I bought a flat in need of some tender loving care.
Fast-forward to 2015. After a good run, I sold the apartment for $943,000. That's a return of close to 950% on invested capital – in about 10 years.
A 94% loss, with the Jag… versus a 950% gain, in real estate. That can be a life-changing difference.

It's easy to take this to the extreme. You'll drive yourself crazy if you constantly consider the possible future value of anything you spend money on ("Shall I get this cappuccino… or put my future child through college?") But it's worth considering that some big expenses carry an enormous potential opportunity cost.
     2. What money is… and isn't.
Everyone must decide on the meaning and role of money in his or her life. And the sooner you figure out what that is, the better. For me:
•   Money is a way of keeping score. There are a lot of ways of keeping score in life, and money is one of them. How much it matters is up to you.
•   Money is a tool. It's a way of getting what you want – whether that's time, travel, space, or sparkly things. Also, money is a useful tool to make more money.
•   Money means options. If you have money, the range of opportunities available to you – things you can do with your time – expands dramatically.
What money isn't to me…
•   It's not an end in itself. The day that you let the number in your bank or brokerage account define you is the day you need a money enema to straighten out your brain. I haven't been there, but I'm guessing neither credit nor cash gets you far in the afterlife.
•   It's not a crutch. A dislikeable former colleague of mine used money and the shiny things it buys as a way to feel better about himself. Maybe that works for some people… but it doesn't work for me.
Everyone's journey to understanding the meaning of money is different. But if I could, I'd go back in time to tell my younger self these things.
     3. The power of compounding – over long periods of time.
Compounding is a simple idea… In short, it means reinvesting returns instead of spending them. Over time, the original investment gets bigger and bigger as more returns are reinvested.
It's like a snowball rolling down a hill. The further it rolls… the bigger it gets.
For example, if I invest $10,000 with an annual interest rate of 5%… after 12 months, I'd get $500 in interest. But instead of spending that $500, I reinvest it on the same terms… And now I'm earning 5% on $10,500. So 12 months later, I'd earn $525 in interest, which I again reinvest… and on it goes.
In the short term, that doesn't sound like a lot. But now look at the magic of compounding over several decades… and the more decades, the better.
Let's say I started investing when I was 25 years old with an annual investment of $20,000 (and I reinvested the interest each time). Assuming compounding at 5% growth per year, at age 65, I'd be sitting on a nest egg of about $2.5 million.
But if instead I'd started at 35, I'd only have about $1.4 million when I retired – that's $1.1 million less – because compounding has had less time to work its magic. That's a huge difference.
So when it comes to compounding… time is the secret to success. Starting as soon as possible and reinvesting interest over several decades can build life-changing wealth.
Good investing,
Kim Iskyan
Editor's note: No matter where you are on your journey to wealth, the right tools can help you make smart decisions when it counts. And that's exactly the kind of key insight you'll find in Kim's free e-letter, the Asia Wealth Investment Daily. It digs into the world's most urgent financial news – and what it all means for your money. Click here to learn more.

Source: DailyWealth

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