part0030

Mark Zuckerberg Didn’t Save His Way To Financial Freedom

Why do people think saving is the key to wealth when the most wealthy people didn’t get to the top by saving?

A really good question. But it lacks depth. Do you really think that a really talented could achieve peak wealth with the effort which he alone put? The answer is NO.

We all know that even the most talented person could only reach the pinnacle of wealth with the help of their relatives.

Let’s take Mark Zuckerberg as an example. He grew up in quite a rich family along with his 3 sisters.

We all do know that Edward Zuckerberg and Karen Kempner Zuckerberg (Parents) tried their best to develop the skills of their talented children. They did hire a tutor, to teach Mark about programming when they noticed that he was interested in programming.

When Mark dropped out of Harvard ($45,958/year for tuition fees alone), his father Edward loaned him money to start the “Facebook”.

In short, their parent did all the hard work to push their son to the top, just so that their son can do the remaining effort.

Edward Zuckerberg was a dentist and successfully did his part of the bidding, saved enough money to become wealthy and make sure that their children have an advantage when they start living their life.

You can find this to be true in most of the other successful billionaires.

Donald Trump’s dad owned thousands of apartment in Queens and New York City (27,000 apartments).
Bill Gates's dad (William Henry Gates II) is a retired American attorney and philanthropist and author of the book “Showing Up for Life: Thoughts on the Gifts of a Lifetime”.
Jeff Bezos who learned his key business skills from his grandfather (who was a very successful scientist, businessman, and landowner)
Warren Buffet’s father (Howard Homan Buffett) was a successful American businessman, investor, and politician.

Most of the millionaires take hundreds and thousands of dollars from their parents and their grandparents as inheritance / borrow them to get started with their life.

As a matter of fact, you need to own enough shares in your own company when it is going public (IPO). How will you have enough money if you are just starting out in life?

Exceptions to this rule:

You can always find exceptions to this rule.

Steve Jobs, for example, had to even step over / openly take advantage of misfortunes to come to the top which happened to people like Stephen Gary Wozniak. It takes a certain grit to become something from nothing. Steve had it.
Jay-Z the famous rapper was a drug dealer and he agrees with it. Luck, skill and ambition to achieve pushed him to make millions.

Other are not so lucky, They have to resort to plain old savings and compounding to take them one step above.

From where your children can pick up and start building more wealth from it. If you happen to fall among the rest, there is only one way to get rich,

Budget – Spend less than you earn
Save – Save the rest of the money.
Buy Assets – Save enough money to buy assets
Optimize returns – optimize returns on your assets
Repeat

“Every penny saved is a penny earned” – Benjamin Franklin.

Honestly, you are doing well if you manage to build on top of your family’s wealth. Just make sure that you do not reset yourself back to zero. It is really easy and tempting (I personally know a lot of ’em).

If your parents have done this work for you, better start building more wealth on top of it. Keep building them and provide a higher nest egg to your children with which they can repeat the same.

In my opinion, you are equally successful as Mark Zuckerberg or Warren Buffet if you convert your family’s $5000 net-worth to 5 million dollars.

As you know, saving is not the way to create wealth for those who already have enough money to buy assets. Even then the general rule of thumb,

“Buy Asset – Generate Money From It – Reinvest The Money Generated To Buy More Assets”.

In other words, Spend less than you Earn – Save – Buy more assets – Repeat.

DID YOU KNOW THAT A THIRD OF THE LOTTERY WINNERS DECLARE BANKRUPTCY?

According to other sources, it might just be higher. The rule is simple. If you do not know how to manage money, it is useless even if you have a million dollars in your bank account. You will be bankrupt at some point in your life.

Sometimes, it is the people whom you surround yourself with who bring you down.

This is repeated across cultures, border and continents. Check your country, what is the figure?

There is no use giving the money to the people who are not worth it. It might be a bit rude but it is the truth.

It is hard to become wealthy and harder to remain wealthy

What are the factors which help people to become and remain wealthy in the first place?

You need people around you who push you to the stars and stay with you no matter what.
You need to keep learning.
You need to become a better personal financial manager.
You need to get your life in order / be responsible for your life and take control of your life.

That’s just sorting out your personal life. You need to sort out the work aspect of your life as well.

You need to be a better person every day. Continually strive for excellence. Even then there are external factors which could drastically affect your possibility of becoming rich. So you need the plain old LUCK.

COMPOUNDING

You need to learn maths and the power of compounding.

This could be the one big game changer for you. As you know, Warren Buffet used it to become wealthy.

As he says, the ideal period for holding a stock is a lifetime. Buy a stock which you know will last for a lifetime with the help of value investing. The table below is for depositing a set amount of money (Rs.12,000) every year for eight years which is also mentioned the Part 19: Home Loan: Is It a Boon In Disguise.

Year	Total Deposited	Total Interest Earned	Balance
1	Rs.12,000	Rs.593	Rs.12,593
2	Rs.24,000	Rs.2,195	Rs.26,195
3	Rs.36,000	Rs.4,884	Rs.40,884
4	Rs.48,000	Rs.8,749	Rs.56,749
5	Rs.60,000	Rs.13,883	Rs.73,883
6	Rs.72,000	Rs.20,387	Rs.92,387
7	Rs.84,000	Rs.28,372	Rs.112,372
8	Rs.96,000	Rs.37,956	Rs.133,956

The goal is to produce more money with the money which you saved/measure your ROI (Return on Investment).

If you produce > 10% return on investment you are bound to multiply your invested amount 5 times over in a 30-year span.

Remember, Einstein’s Rule of 72 :

Interest Earned x Years Required = 72

It is hard to not speak about the above-mentioned rule while speaking about compounding. For example, you want to double your money in 10 years.

Interest Earned = 72/10 = 7.2%

So, you need to aim for a 7.2% interest rate in order to double your invested money in 10 years. It’s as simple as that.

It does not matter if you fail to find a million dollar startup. With the help of compounding, you will definitely quadruple your money invested.

For that, you need to save enough money to invest.

Every financial book speaks about the rule of 72 right? There is an inherent flaw in the equation which nobody speak about. The equation is fairly accurate for interest rates less than 9% or for the number of years more than 8 years. To understand what I mean, let’s have a look at the table below which calculates how long it takes for a $1000 to be doubled for variable interest rates.

Number of Years	Interest Rate	Balance
1	72%	$1,720.00
2	36%	$1,849.60
3	24%	$1,906.62
4	18%	$1,938.78
5	14.4%	$1,959.43
6	12%	$1,973.82
7	10.28%	$1,983.71
8	9%	$1,992.56
9	8%	$1,999.00
10	7.2%	$2,004.23
11	6.454%	$2,009.50
12	6%	$2,012.20
13	5.54%	$2,015.68
14	5.14%	$2,017.21
15	4.8%	$2,020.32

To reduce the error factor, I use a customized version of Einstein’s rule of 72 which I had developed. Let’s just call it “Improvised Rule of 72” .

If you know the number of years, then use this formula:

Number of Years x Interest Rate = 72 + (28 / Number of Years)

The estimated interest rate then is fairly accurate for the first 15 years for a principal amount of $1000 which is evident from the table mentioned below.

Number of Years	Interest Rate	Balance
1	100%	$2,000.00
2	43%	$2,044.90
3	27.1%	$2,053.23
4	19.75%	$2,056.37
5	15.5%	$2,055.46
6	12.7%	$2,049.01
7	10.8%	$2,050.12
8	9.43%	$2,056.32
9	8.34%	$2,056.36
10	7.48%	$2,057.20
11	6.77%	$2,055.61
12	6.19%	$2,055.91
13	5.70%	$2,055.77
14	5.28%	$2,055.14
15	4.92%	$2,055.30

As you can see from the above table, the error margin is now ~ 57 dollars instead of a wide variation of about ~94 to ~ 1 dollars.

This calculation could be used to reliably predict the interest rate required to double your wealth. If you are a person who would like to further reduce the error margin then you should use a much complex version of my formula which reduces the error margin to ~ 7 dollars.

The formula was developed to reliably develop a solution to calculate the interest rate required to double your invested capital when you know the number of years.

This new formula is mentioned below:

Interest Rate Required =

( 72 + ( 28 / Number of Years ) / Number of Years ) -

( 28 / ( Number of Years * 10 ))

The table for the above mentioned formula for a principal amount of $1000 is as follows:

Number of Years	Interest Rate	Balance
1	97.2%	$1,972.00
2	41.6%	$2,005.06
3	26.17%	$2,008.48
4	19.05%	$2,008.71
5	14.96%	$2,007.86
6	12.31%	$2,006.83
7	10.45%	$2,006.48
8	9.08%	$2,004.29
9	8.03%	$2,004.01
10	7.2%	$2,004.23
11	6.52%	$2,003.28
12	5.96%	$2,003.10
13	5.48%	$2,000.84
14	5.08%	$2,001.16
15	4.74%	$2,003.04

Often, the first year produces wrong results. It is expected as the formula promises accurate results for compound interest only and not for simple interest.

Calculating the interest rate for when the number of years > 1 would produce best results as enough time has to be provided to calculate the effect of compounding.

Let me know your comments on the above formula and if you do have a better formula for further reducing the error margin, do let me know. Check my contact details at the end of the book.