According to Einstein, there’s an 8th wonder of the world: compound interest. He said “ he who understands compound interest earns it, and he who doesn’t pays it.”
The Titanium 7-Year Rule is my strategy for making compound interest work in my favor, and I’m going to share it with you here. First, let’s talk a little more about compound interest.
What is Compound Interest?
Imagine you and your friend are about to play a round of golf. You suggest playing for $5 a hole. Your friend suggests starting at 25 cents for the first hole and doubling the wager each hole.
Option 1 results in $90 in wagers, while option 2 would result in close to $65,000 in total wagers. This is a terrible strategy for wagering money, but an excellent strategy for making money.
In this analogy, option 1 is putting money in a standard savings account. You put a flat rate in each week and the interest is virtually non-existent.
Option 2 is like investing in stocks or real estate. The gains are of course less than the steady 100% increases in the golf example, but the principle of compound interest is still the same.
The Titanium 7-Year Rule is based on compound interest. It states one can expect a 10 percent return on investment over the span of 7 years. It’s not quite as outstanding as the golf example, but this rule can still make you a lot of money.
Say you buy a $100,000 house with $20,000 down. In 7 years, you go to sell and you get $110,000. How much has your investment grown?
Most people say 10 percent. Actually, your investment has grown 50 percent. You only put $20,000 in initially. You could sell at $102,000 and still get a 10 percent return.
Compound Interest and the Titanium 7-Year Rule
The Titanium 7-Year Rule is based on the assumption that you can make at least 10 percent return on any investment you hold onto for at least 7 years.
The rule itself is this: If you hold off on buying any liability today, then you can have that liability for free in 7 years.
Imagine you’re in the market for a Mercedes. There’s nothing wrong with your current car. You just want a new car. This car costs $100,000. Instead of paying $100,000 now, imagine if you instead invested that money into an asset and held onto it for 7 years?
You’d have at least $110,000, which would be enough to buy the car and have some money left over.
If you aren’t buying the car outright, the Titanium 7-Year Rule still applies to payments. Say the payments are $500 a month. If you hold off on the purchase and invest that $500 each month, then you’ll see the same results.
A lot of my clients say to me “ But Arman, I barely get by. I don’t have that kind of money to invest.”
The best thing about the Titanium 7-Year Rule is the size of your bank account is irrelevant.
Let’s start with $100. I’m sure you can cut expenses and free up $100 a month. What if you invested this $100 every month for 7 years, and then stopped?
That’s not much money, but the power of compound interest would turn this investment into $100,000 in 30 years.
The bottom line is compound interest can either be your best friend or your worst enemy. Stick with the Titanium Life to keep compound interest in your corner.
If you need help cutting expenses to free up money for investment, then contact Arman do discuss coaching options today.