In one of my popular articles where I laid out the simple formula to become wealthy, I provided a list of actions that a wealth builder can take to reach his/her wealth goal.
Then we narrowed down to three factors that we can control among this list:
- Choosing when to start investing
- Increase funding of wealth building
- Retire later
Amongst them, increase funding is within your control, but usually you have to make hard life choices. If you cannot fund a large amount to wealth building, you need to ensure that your rate of return is high.
How much difference does this two factors, your funding rate and wealth returns matter?
Vanguard have a great way of presenting this in their beginner investor guide. This is a simulation of a person who starts of with $10k and wants to build up to $500k. He starts of funneling $5k of his disposable income into wealth building.
Vanguard simulates if he increases each years funneling by 10%, 5% or no increase of that $5k at all.
They also simulate 2 different Wealth returns, a good return 8% and a mediocre one 4%.
Some how even though the rate of return doubles, you realize that the amount you funnel to wealth building matters more than the rate of return.
If the person do not increase the amount funnel to wealth building , the difference could be 15 to 40 years of difference. And of course it is best if we can have a high savings rate and competent to get consistent high returns as well.
To speed up your goal towards Financial Independence, a couple can make decisions to proactively think how they can cut expenses, increase income to increase their funding to wealth building.