The secret the wealthy used to get rich...

Camden L. Chen

The average age to retire in the United States is 62 years old. However, what if it was possible to retire at 50? Retiring at an early age is not as irregular as one may think- and it does not even require one to be a superstar or athlete to do so.

Starting early

Beginning young is the easiest way to prosperity. Investing in compound assets solidifies the growth rate of one's capital. In the diagram shown below, investing 200 dollars a month at the age of 25 ($96,000) grosses 200% more than a person who saves the same money at age 45 ($48,000.) Imagine the wealth of someone who started at the age of 10 or 15. Of course, this assumes the value of their portfolio grows at a consistent positive rate. Starting earlier allows for more mistakes and yields higher chances of wealth. If it is the minor who is investing, then they may spot mid-cap stocks. When buying young stocks, it is similar to buying a company, such as McDonald's, when it first IPO.

Debt

The government spends more money than it makes. To compensate, they issue out US Treasuries. The government uses these notes to regulate the economy and raise funds for projects. Government bonds are the most secure way for returns. Since the US government can print its currency, they have never defaulted for realizing their debt. Government debt separates into 2, 3, 5, 7, and 10 years. The coupon rate (return) increases as the number of years increases due to risk factors. For instance, if a kid's friend asked him to borrow his toy for a few minutes, the kid could lend it to him without much apprehension. However, if the kid's friend instead asked him to borrow his toy for a few days, he would likely think more about the more imminent risks. What is the difference? In this scenario, when the friend asked for the boy's toy for a few minutes, the boy could predict what would happen shortly. However, when extended to a few days, the future became less apparent, and the boy would have to assess the level of trust he has for his friend. Bonds utilize the same concept. Purchase bonds from a third-party broker such as Market Axis. To outperform the market, purchase bonds with higher interest rates. When the government increases the interest rates in the new issues, the value of the previous bonds decreases. If the government reduces the interest rates for the new bonds, the value of the old bonds increases. Investors may even pay less than the value of the bond at the end of the coupon. Investors would preferably allocate their capital to securities with higher returns, which means they may sell a bond that yields much less than a new bond. This concept is called opportunity cost.

Stocks

Stocks may yield higher returns but have more risks. Stocks are fragments of a company. If the company performs well, all the investors relish the returns as the value of their shares increases. Once traded through paper certificates, stocks are now traded digitally through stock exchanges. Investors use varying strategies to predict the companies that would increase in value. One strategy is observing qualitative data such as the balance sheet. These investors attempt to find trends in the revenues, debt, and other finances such as dividends. Value investors observe more mature companies that have developed healthy habits of consistently growing profits and business mode, with little debt. This strategy uses advanced models to predict growth in stocks. Value investing would be the safest plan for investing in stocks as the investor uses previous data to interpret the future. Due to the high safety, some people tuck away these value stocks into their portfolios and allow them to grow wealth while they sleep. This is called the coffee can approach when people would put their stock certificates into a coffee can and let them accumulate compound value. Some companies will prosper and gather handsome returns, but others will lose much of their value if not selected correctly. To gather the best returns, try to buy stocks at lower valuation (less than 20 PE or 2 PEG) as if the market “normalizes” them, then it would return to its actual value when the market no longer has apprehension around the stock. However, beware of value traps when stocks do seem cheap but are actually priced in for their troubles. If you do not believe that you would have the time to research and invest by yourself, many have set up hedge funds and indexes that invest for you. Popular indices include the S&P 500 and the Dow Jones.

Reinvesting in yourself

Not all the money made must be reinvested. After all, what is the point of a trillion dollars if someone can’t spend it? For example, you can use money earned from dividends for personal pleasure such as buying new clothes or buying game currency. Or, you could allocate a percentage of your earned money to spend for fun. For example, perhaps spend 10% of your monthly savings on recreational things, but spend 70% for expenses, and save 20% in investing.

Disclaimer

This article is not implying the reader's financial advice should not be a reference for making financial decisions. Thank you for reading the article :)