In a recent interview entrepreneur Daymond
John, founder of FUBU and member of ABC’s Shark Tank, offered some noteworthy
money advice to the audience. John has
amassed a fortune estimated to be around $300 million primarily through his
FUBU business, as well as smaller ventures, so it is always worthwhile to learn
from his perspective.
When asked what advice he would give a
younger version of himself he said, “Make sure [I] have financial
intelligence.” Sound fiscal principles that constitute being financially
intelligent are ubiquitous with success. Importantly, this skill set can be
learned. Attaining financial aptitude can be accomplished through studying the
successful investors and entrepreneurs throughout history (i.e. create a
personal financial plan that is a mimicry of a successful person’s process),
reading books or blogs that will increase your financial IQ, as well as having
discussions with individuals in your social circle who exhibit sound financial
decision making ability.
He continues by stating, “Money is hard to
make and it is ten times harder to keep.” This is humbling advice from a
businessman of John’s stature considering the work he put in to create FUBU and
the challenges he currently faces in preserving his wealth. Additionally, he
emphasizes two areas of personal finance that everyone should understand:
Compounding interest and managing household finances.
The former, compounding interest, is one of
the most powerful wealth-creation tools. In fact, Warren Buffett attributes a
majority of his wealth to compounding interest. The only catch is that it takes
time to compound your savings into a sizable amount. However, by its nature
compounding is exponential since the interest earned on savings earns its own
interest. In other words, as you reinvest interest there are more savings on
which to earn interest in the next payment cycle (e.g. quarterly or annually)
thereby resulting in a greater future payout. Of course, compounding of
interest is predicated on your ability to manage finances profitably in order
to have savings to compound.
As mentioned, John’s latter point pertains to
running a profitable household. Simply put, you need to decide on how much to
spend based on your income. Too often there is a net negative amount after
accounting for all household expenditures. Unfortunately, this does not leave
any room for the accumulation of savings and resulting compounding of interest
to take effect. John encourages you to take a serious look at how much can be
reasonably afforded and to not exceed this threshold. Otherwise, it will become
impossible to ever create any savings.
An action plan at this point would be to
start tracking income and expenses for the current month and putting a plan in
place (i.e. a “budget”) with the goal being to start accumulating as much
savings as possible (i.e. creating a net positive amount after expenses are
deducted from income). Keeping track of monthly income and expenses will create
financial awareness and provide a better chance for having some money left over
to save and compound.
In order to display how these concepts work,
the example below depicts the impact of saving $25 a week and compounding the
interest at 5.5% per year on average. These weekly savings would amount to a
manageable $1300 per year and are shown in the lower portion of the graph. Forecasted
account totals are separated by decade. As can be seen, the majority of the
projected total account value is attributed to compounded interest. The
exponential growth behavior of the compounded interest can also be clearly seen
in this graph. Keep this chart handy as a visual reminder of the power of
compounding and to keep your savings goals in mind.
As always, if you have questions or comments,
feel free to send me a message. Thanks for reading.
JD
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