One of the Worlds Richest Men Attributes his great wealth to understanding a simple financial concept
Warren Buffett was asked once about why, as one of the world’s richest men, he didn’t every buy or own a new car. His answer was that very early in life, as a teenager, he had discovered and came to understand the power of compound growth.
He explained that as he saw it, the $10,000 that it would cost to buy a new car (this was a long time ago…) would compound and grow at a 9% rate if he invested it, instead of buying the car. After 40 years, he explained, that $10,000 would be worth (do the math…) $314,000. As saw it, no new car was worth that much money, so he always drove a beater.
In other words, Mr. Buffett was constantly thinking in terms of the future value of his money, rather than what it is worth today. If there were one financial lesson I want all young people to learn and understand, it is this one – compound growth, over a long enough time period, can create fabulous wealth. A few examples:
Eating Lunch Out: Today’s Cost: $10. Future Value Cost: $314. One expensive lunch! Packing my PB&J tomorrow!
High End Smart Phone: Today’s Cost: $900 Future Value Cost: $28,268 I like my 3 year old Samsung!
Disney Vacation for Four: Today’s Cost: $8000 Future Value Cost: $251,275. Camping starting to look good?
Another way to think about the idea of future value is to consider today’s decision from the eyes of your self 40 years from now. Today as I approach my 60th year, I can look back and say, gee, if I hadn’t spent $300 on beer my final year in college (it was about all I can remember spending money on when I was 20) and had instead invested it in a stock mutual fund that grew 9% per year, I would be $9,422 richer today.
Sigh. And it wasn’t even good beer. But in retrospect, those were good times. Probably worth the $9,422. But not so sure about that Disney Vacation.