Want to know Warren Buffett’s biggest secret? Discover the magic of compounding explained in simple English, and learn how to retire early with your FIRE plan.
Introduction
When you hear the name “Warren Buffett,” what do you think of? You probably think of a super-smart math genius who knows exactly which stocks to buy. But that is only half the story.
In our previous post, 7 Life-Changing Lessons from The Psychology of Money, we learned in Lesson 3 that compound interest is basically money making money while you sleep. Today, we are going to dive deeper into this magic. We will learn how compounding works so simply that even an elementary school student can understand it, and why “time” is your best friend in your FIRE journey.
What is Compounding? The Magic Snowball
Imagine you are at the top of a snowy mountain. You make a small snowball in your hands. It is very tiny. But when you roll it down the hill, it picks up a little more snow. As it gets bigger, it picks up even more snow at a faster rate. By the time it reaches the bottom of the mountain, that tiny snowball is a giant snow boulder.
This is exactly how “Compounding” works with your money. When you invest your money, it earns a little bit of profit (interest or dividends). The next year, you earn profit not only on your original money, but also on the profit you made last year! Your money has “money babies,” and then those babies grow up to have their own “money babies.” Over time, your small money grows into a giant boulder of wealth.
Warren Buffett’s Real Secret is Time
In the book The Psychology of Money, the author shares a shocking fact about Warren Buffett. As of the writing of the book, his net worth was $84.5 billion.
Do you know how much of that money he made after his 65th birthday? $81.5 billion!.
Warren Buffett is a great investor, but his real secret is that he has been investing consistently since he was 10 years old. If he had started investing at age 30 and retired at age 60 to play golf, his net worth today would be 99.9% less. He would not be famous. His skill is investing, but his true secret is time.
You Do Not Need to Be a Genius
What does this mean for our Easy FIRE Plan? It means you do not need to take crazy risks or be a genius to get wealthy.
Many people spend all their time trying to find the “perfect” stock or the highest return. But good investing is not necessarily about earning the highest returns. It is about earning pretty good returns that you can stick with for a very long time. That is when compounding runs wild.
Conclusion
You do not need tremendous force to create tremendous results. You just need to start your snowball today, keep adding to it, and give it a long time to roll down the mountain.
Remember our philosophy: Invest simply. Retire early. Enjoy life sooner. Have you started rolling your snowball yet? Let me know in the comments below! And do not forget to subscribe to my free newsletter for more simple investing tips.