The Two Golden Rules Of Wealth Building
Warren Buffett teaches us that there are two rules in building wealth:
Rule #1: Never lose money
Rule #2: Never forget rule #1
Most investors have heard and read this many times, but may have thought “how can one never lose, and how can that be the single most important rule in investing?”
The real meaning of the rules lies behind the words and if we dig deep behind them, we will understand their real value. Let me decode it for you here. Please read it with full concentration, as these two rules are really worth everything when it comes to building wealth.
First, imagine you are offered the opportunity to flip a coin one time. You win $150 if you call heads or tails correctly, but you pay $100 if you are wrong. Would you flip the coin? If you said no, you’re in good company. Despite equal odds, most people refuse to play because the pain of losing $100 outweighs the potential thrill of winning $150.
Nobody likes to lose money. However, when we apply actual numbers, you might be surprised with the findings and just how detrimental it can be to lose money.
Let me give you an example: If a person invested $1,000 and lost 25%, or $250, of that, how long would it take to recover that $250 loss? If that person earned a 10% return in the years following the loss, it would take him 3 years to recover the $250 loss. If it was 50% loss, or $500, it would take him 7.3 years to recover it. A 75% loss, or $750, would take him 14.5 years and a 95% loss, or $950, would take him 31.4 years to recover the loss.
It is interesting to note that the number of years it takes to get the money back doubles with each loss increment, meaning the higher the loss, the longer it takes to recover your money. Given how long it can take to recover lost money, do you see why this is Buffett’s #1 rule in investing?
You see, Buffett looks at money as a seed, a seed that can be planted to earn more money in the future. That’s why avoiding the loss of money is so important. It’s hard enough to earn it in the first place. If you lose it, you have to first earn back the same amount of money all over again, just to break even!
As important a principle as this is, some people are practicing the opposite of the “money as a seed” principle. Most people who are having money problems would never even think of giving money away, yet that’s exactly what they do. They give money away with poorly thought-out investments and spending on material things that are sure to lose their value.
One of the characteristics of many self-made millionaires is that they made their money cautiously, conservatively and by investing wisely. Don’t try to get rich quickly where you could run the risk of losing your money. Concentrate rather on getting rich slowly. If all you do is save ten percent of your income, put it away, and let it accumulate at compound interest, that alone will make you wealthy.
If you are serious about wanting more money in your life, you have to be serious about each dollar you have and develop an attitude of hating to lose money. See money as a seed and not a ticket. A ticket is redeemed and then it’s gone forever. Seeds can be planted to earn more and more dollars.
Monty Campbell is a self-made multimillionaire. But he wasn’t always successful. Growing up in a lower income family, he started with nothing and worked his way to wealth. By following the timeless principles of success and wealth building, he literally went from zero to multimillionaire.
It wasn’t easy and it didn’t happen overnight, but Monty achieved the American dream of financial freedom. He’s appeared on CNN and appears regularly on the Bring on Success radio program. He’s also the author of the popular book, “The Financial Freedom Formula”. He writes about achieving financial freedom on his blog at http://www.montycampbell.com.
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