The Capital Snowball
“Compound interest is the eighth wonder of the world. He who understands it earns it. He who doesn’t….pays it.“ – Albert Einstein
Now that you are on your way to becoming a Capitalist I want to describe one of the greatest phenomena that occurs in personal finance.
The Capital Snowball.
Much like there is a tipping point in the Debt Snowball (as one debt gets paid off, there is acceleration in repayment of the remaining debts as more and more funds become available), there is a Capital Snowball tipping point.
Too often many physicians are at the wrong end of this financial phenomena.
I was one of them.
When I undertook the maximum student loans available I then made one of my famous financial mistakes of electing to ask (and receive) forbearance on the majority of the balance when I started residency.
Interest continued to accrue while I continued not to make any payments.
I even had the opportunity to pay the accrued interest before it compounded (i.e. became part of the principal which then would accrue it’s own interest charges) but elected not to.
It is not a good financial predicament to be in when the lender’s interest is itself earning more interest.
This path was indeed the path to making someone wealthy, but unfortunately that someone was not me.
The key therefore is not to be the borrower but the lender in this financial equation and take advantage of compound interest.
When you are a capitalist you are able to deploy/lend out your “seed” money through various avenues and then sit back and watch your original “money employee” work to create more money.
At one point in the building of capital, the income generated from previously deployed capital will add to the system at a higher rate than your initial contributions.
This income can be from interest, dividends, capital gains, etc.
The incoming money can then be redeployed in the original venture or can aid in diversification by being invested in other income generating opportunities.
“Money is a terrible master but an excellent servant.” – P.T. Barnum
Once your capital snowball becomes a self-sustaining/self-feeding system, you have truly reached financial independence and can make money while you sleep.
This results in true financial bliss.
Superpower Take-home points:
- Get to the Capital Snowball tipping point. The system will take on a life of it’s own with only you as the beneficiary of its hard work
- Compound interest is the eighth wonder of the world and you need to be on the right side (lender) of the equation to benefit.
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