There are many Australians that have no investments at 40, apart from some superannuation funds, and perhaps, if lucky, a house. If you fall into this category, don't despair, there's still plenty of time to right your ship of wealth. After all, the legendary investor Warren Buffett only became a billionaire at age 50.
Today, he's worth over US$108 billion, meaning he has made 99% of his fortune after the age of 50. And his company Berkshire Hathaway is worth close to US$700 billion.
Now, I'm not saying that you too can become a billionaire in just ten years. There's only one Warren Buffett.
But we can still use his principles to harness the amazing effects of compound interest in building wealth.
Here are three Buffett principles that an investor at 40 could use:
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Start at the bottom
One cannot build wealth from a position of weakness. So the first thing to do is to get your financial house in order. A good way to start might be to eliminate any unnecessary debts from your life.
Car loans, credit cards and anything that isn't borrowed against an appreciating asset (i.e. property) is kryptonite for wealth building. Get rid of the debt and stay debt free.
After this, an aspiring investor needs to make sure that they have surplus cash to be able to invest. So if you're spending more than you are making each week, fortnight or month, it's time to rectify this situation.
Building wealth starts with finding the money you can invest consistently. So maybe it's time to run a ruler through your expenses and find some savings. One could also try and boost your income.
Buffett invests judiciously. We should do the same
Buffett once said this:
I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it, so that you had 20 punches — representing all the investments that you got to make in a lifetime.
And once you'd punch through the card, you couldn't make any more investments at all… you'd really have to think carefully about what you did, and you'd be forced to load up on what you really think about. So you'd do much better.
He also once (even more famously) told us that the first (and only) rule of investing is "don't lose money".
Using these two quotes, we can conclude that all investors should be extremely thrifty with their investment dollars, and only put cash into the very best ideas.
This might be difficult for an investor who has never invested before. So there's no harm in starting out with an index fund. That's an idea Buffett has also endorsed in the past.
Be patient and stick to the plan
Harnessing compound interest is what successful investing is all about. But its effects take time and are not always obvious at first. Buffett's right-hand man Charlie Munger once said, "the first rule of compounding: Never interrupt it unnecessarily".
If you invested $30,000 into an investment returning 7% per annum, you would only have $42,529 after five years. But after 15, you'd have $85,468.
If you invested an extra $200 a month, that would grow to $148,861. Double it to $400 a month, and you'd be looking at $212,253.
Investing doesn't work if you are constantly dipping in and out of markets or taking your profits to go and buy a new TV. You need to have a plan and stick to it over a long period of time.
That's what Buffett has done, and that's what we all should do to harness the power of compound interest by investing in shares.
