As I have written before, I am a big fan of compounding. It excites me to no end to think of the power of money that I have invested growing over time. I’m also very much inspired by stories like Warren Buffett’s, which Alice Schroeder captures so well in her Buffett biography “The Snowball.”
In the book, the snowball is a simple image that encapsulates Buffett’s journey to incredible wealth. Buffett used his business acumen, personal gifts, and the power of compound interest (!) to attain a level of financial success that is practically unheard of (while being, most importantly, a decent human being). Us mere mortals can take inspiration from stories like his to achieve our own financial well-being, however modest it may seem in comparison.
If we are to achieve our own financial snowballs, clearly the power of compounding will be important. But what is the catalyst that makes compounding possible?
The answer? Savings.
The money you save is the capital you use to invest. Without it, investing doesn’t happen.
By saving a portion of the money you bring in, you then have money you can put to work compounding, that is growing through compounding interest.
Saving Money + Investing It + Leaving it in There for a LONG time = COMPOUNDING (er, Savings!) SNOWBALL!
As for my wife and myself, the results of doing this these past few years have already been life-changing. These results include:
- Actually having savings. If unexpected expenses comes up, there’s money to handle it with little (or at least less) concern, instead of scrambling to put it on a credit card and worrying about how to pay it off.
- Eliminating monthly debt servicing. Not having to pay off debt every month brings incredible peace of mind! Not to mention, it frees up even more capital to go towards growing net worth.
- Witnessing the snowball work its magic. When the market goes up, our investments go up with it.* Score!
These results would not have happened had we not embraced the idea of paying ourselves first. In other words, we decided that a portion of the money we earn is ours to keep. We then began systematically saving and investing that portion.
By now this practice has become a part of our lives. Simple as this may sound, it was the basis for starting our own little snowball.
Something I particularly enjoy watching gain mass as it rolls down the hill…
*When the market goes down, that’s an opportunity to add to our collection by buying more little snowballs on the cheap!