• 03:04:43 am on November 15, 2008 | 12
    Tags: , , , , ,

    mountain2

    My Mountain’s too steep! – Part 2

    In my last post we started answering the question about what to do if your ‘mountain’ is too steep – that is, your Number just seems way too large: we started with the natural reaction, which is to try and knock some off the top …

    … but, if you’ve ever tried to make a mountain into a molehill, you can see how tough that can really be.

    But, there’s a MUCH easier way!

    When you realize that it’s not the size of the mountain that’s important (unless, of course, you’re talking about climbing Everest and you are worried about snow, ice and rarefied air!) but the steepness of the climb then you have made a major breakthrough in your thinking.

    Ever seen a mountain way off in the distance?

    It looks low … but it may not be, it may be real high. Intuitively, you realize that if the road that you are on would just gradually climb all the way until you get there, you would be at the top of that huge mountain and barely even realize it.

    A long distance between you and the mountain means a shallow climb (just – and, this is the key – spread over that long distance) so, it’s not so hard to climb at all …

    In the real world, though, mountains don’t come with nice, long, flat roads to the top … they look more like the mountain in the picture above.

    But, the same principle applies: whether you stand at the first marker (on the left) or the second marker (in the middle) makes a BIG difference as to whether you’ll make it to the third marker (on the right) at the top!

    The difference is the ‘run up’ that you get … building up the steam and momentum that helps to carry you all the way to the top: it’s how a cyclist gets up a steep hill … so, it’s actually easier to get up if you just start a little further away, where the road is a little less steep.

    In the world of money, the ‘momentum’ that we build up comes from the power of compounding; just take a look at how $1,000 compounds over 30 years (@ 10% p.a.represented by the blue part of the graph, below) … more importantly, look at what happens if we start just 10 years later (represented by the red part of the graph):

    mountain11

    … we can get to the same end point, but only by increasing our annual compound growth rate byΒ  a hefty 55% (i.e. to 15.5% p.a.).

    Increasing our compound growth rate implies increasing our risk e.g. moving from cash to investing in stocks; or, moving from stocks to investing in real-estate; or, moving from investing in real-estate to buying a business; or, moving from buying a business to starting our own.

    So, if you want to give yourself the maximum chance to reach the Number that you need to live your Life’s Purpose, by all means look at what you can trim back (without compromising your true needs) …

    … but, more importantly, give yourself just a little more time to get there:

    Extend your Date!

    That’s it: the all-too-simple ‘secret’ to financial success revealed at last πŸ™‚

     

Comments

  • Scott 8:48 am on November 15, 2008 | #

    Good post. What I learned from this post and using the Annual Effective Rate calculator: http://www.investopedia.com/calculator/AnnualEffectiveRate.aspx

    is that if I keep up my focus, work and investing for another 5 years past my 10 year date, I can drop my required compound growth rate by 3%(from 40% down to 37%), however, quadruple my number accomplished from 4 million to 16 million, and i’ll still be in my 40’s.

    Incredible what taking a little more time can do for you!

  • AJC 10:35 am on November 15, 2008 | #

    @ Scott – What you say is absolutely true; however, it’s also the reverse that I want everyone to consider:

    How much does delaying your Date by 1, 2 or 3 years (or more) REDUCE your required compound growth rate? And, what does reducing your compound growth rate mean to you?

  • Scott 11:02 am on November 15, 2008 | #

    Oh no, I definitely don’t won’t to wait a minute longer than I have to, to get to my number and get to live my life’s purpose. I would rather get there in half the time, or better, tomorrow if possible, lol. But like we are talking about, that would require me to steepen my mountain exponentially.

    It just boggled my mind though to see the power that time can do for you. The way a few extra years QUADRUPLED the number while at the same time, reducing the required annual compound growth rate powerfully illustrates the point you were trying to make in this post, I think.

    In other words “If you are willing to deal with the pain of waiting a little longer to live your life’s purpose, not only will you get 4 times the money, but you can even take the pedal off the metal a bit along the way.”

    TIME can be such a powerful wealth building tool.

  • Scott 11:16 am on November 15, 2008 | #

    But I think the whole point here is to choose the investing vehicle that gives you the required annual growth rate that you feel you can personally achieve and if this vehicle your are about to get into does not lead you to your NUMBER by your DATE, then another option is to simply travel longer than you planned.

  • Lee 1:26 pm on November 15, 2008 | #

    My take on this is a little bit different for one major reason. I have less time to get to the top.

    I really don’t feel like I can lengthen my time so at best I need to lower my expectations, rethink my “List” and see just what else I can do without.

    I’ve done just that and am satisfied. My grandkids will just have to live with it. πŸ™‚

  • AJC 4:39 pm on November 15, 2008 | #

    @ Scott – The ‘momentum’ that you build up getting TO your Number can often carry you well BEYOND your Number … but, you can’t plan on that. BUT, it is a reason why the Rule of 20 is probably sufficient for ‘targeting’ purposes. The 3% or so reduction in Compound Growth Rate is unlikely to be visible (except, perhaps, where it allows you to stay in Index Funds rather than investing in individual stocks … in most other cases, the jumps are just too high).

    @ Lee – Exactly right … for you! πŸ˜‰

    In fact, EVERYBODY should be able to see that the three variables: Number; Date; Investment Type/s can be ‘played with’ to achieve the individual outcome that YOU need … and, only YOU can know that – the grandchildren will accept whatever you decide (as long as it’s something that you would be happy to write into your Rear Deck Speech).

  • Debbie 6:33 pm on November 15, 2008 | #

    Makes me wish we started this 10 years ago!

  • AJC 10:39 pm on November 15, 2008 | #

    @ Debbie – I did πŸ˜› Thanks to Michael Gerber and the E-Myth: http://www.amazon.com/E-Myth-Revisited-Small-Businesses-About/dp/0887307280/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1226810343&sr=8-1 [NOT an Affiliate Link!]

  • Debbie 11:48 am on November 17, 2008 | #

    @ AJC – I should have said, makes me wish *I* started this 10 years ago! I have read E Myth Revisited (twice now) and have The E Myth Mastery waiting for me. Excellent information.

  • AJC 4:15 pm on November 17, 2008 | #

    @ Debbie – better now than in 10 years time πŸ™‚ Good luck with the E-Myth stuff … I’ll help you through whatever questions you have.

  • Jeff 6:58 am on November 24, 2008 | #

    @AJC – Great post and oh so true. Whenever I’ve flown a low level route through the mountains it’s always been easier and safer to start a shallow climb to get over the next ridge/mountain rather than waiting.

    However, in an airplane it is a lot more FUN to delay the climb, get closer to the mountain, pull a BUNCH of G’s to get the nose into the vertical and see the trees go rushing by in your peripheral vision. What a great ride.

    It’s Certainly not as safe, but definitely more fun. πŸ™‚

    Keep up the great work. I’m really enjoying this site.
    Jeff

  • AJC 7:41 am on November 24, 2008 | #

    @ Jeff – So it goes for the Great Entrepreneurial Ride … pull back the stick and hang on for Dear Life! But, I don’t recommend it as a strategy πŸ˜‰


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