As I’ve written before, real wealth is built when your money is compounded. Similarly, wealth can never be built if you’re in debt because your debt is also compounded. I wanted to begin this blog post by highlighting the obvious and that is that you should never get into any kind of debt including credit card debt.
But the problem is not with your credit card but your spending habits. And with the right spending habits, credit card is your friend and not your foe.
In 2016, when we launched our dropshipping business, we did a massive spend on Facebook advertising. We were maxing out 4 credit cards daily and were clearing the credit card bills daily as well. We could have used our debit cards too, except that they don’t come with loyalty points, cashbacks, airline miles converting into free tickets, free fuel, chargeback privileges, and theft protection.
The key is that you must always use your credit cards like debit cards and never go in debt. You should always clear your bills timely, and never spend money that you don’t have. I advise you to enable “auto-pay” when getting your credit cards and link it to your current/checkings account.
Here’s a proof of me redeeming points for fuel just 2 weeks ago.
Not using credit cards is like leaving free money on the table. And not using them right, is like giving away your future money as well.
Yesterday, I wrote a bit about importance of investing. I showed the returns of S&P 500 Index for 10 years from Jan 2009, to Jan 2019. I mentioned that your returns would be over 200% in 10 years in USD. I further mentioned, that if you re-invest your dividends, you would have a return of 270% in the same period. See the additional 70%? This is where all the magic happens.
Let me explain this with an example. Suppose you receive a sum of Rs 100,000 at your graduation at the age of 22. You invest this money at an average rate of return of 10% per year and you keep this money invested for 40 years until your retirement at 62. During this investment, you have two options; you can either withdraw your returns every year at Rs 10,000 per year or you could re-invest your profit. Let’s discuss in detail what happens in both cases.
If you withdraw profits every year, after 40 years you would have Rs 400,000 (40 x 10,000) profit and Rs 100,000 principal. Giving you a total of Rs 500,000 after 40 years. Not so interesting, is it?
But if you re-invested Rs 10,000 profit every year, you would have Rs 4,525,925 after 40 years. A bit more interesting, isn’t it?
You invested the same amount of money, your rate of return was identical, and with the first option your capital stood at 5X while with the second option it stands at a whooping 45X. Here’s a compounding calculator for you to test all sorts of cases.