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Image source: The Motley Fool
Even with zero savings in the bank, it is possible to at least start planning to build wealth today. I was able to reduce my debt, increase my passive income, and start accumulating some savings. Then I can consider investing in the wealth machine that is the stock market. And to do that, I’ll take inspiration from billionaire investment legend Warren Buffett.
Here are three lessons from Buffett that I will follow to help me start accumulating wealth.
The magic of compound interest
First of all, this is an exercise to demonstrate that it is never too late to start investing money in stocks. The secret is that I have a very powerful force to help me build wealth: compound interest.
Let’s assume I start 2023 with no savings, but commit to putting £100 a week into the stock market from then on. And let’s assume I earn 9% annual return on my money, which is the long-term market average. What will happen?
Well, in the beginning, for a few years, nothing spectacular happened. In that sense, it is rather like going to the gym. A few workouts in isolation will not produce the physique of your dreams. But the cumulative effect over time can be overwhelming.
| year | Savings (£433 x 12) | Compound interest | Total |
| 0 | £0 | – | £0 |
| 1 | £5,200 | £219 | £5,419 |
| 2 | £5,200 | £947 | £11,339 |
| 5 | £5,200 | £6,678 | £32,658 |
| 10 | £5,200 | £31,831 | £83,791 |
| 15 | £5,200 | £85,909 | £163,849 |
| 20 | £5,200 | £185,275 | £289,195 |
| 25 | £5,200 | £355,545 | £485,445 |
| 30 | £5,200 | £636,831 | £792,711 |
If I can start putting more than £100 a week into stocks, then the figure of £792,711 could be even higher. And if I find a stock that beats the market average by 9%, then I’m looking for a life-changing amount of money.
Compound interest explains why 90% of Warren Buffett’s wealth (now more than $100 billion) has been accumulated since the age of 65.
No wonder Albert Einstein would have said: “Compound interest is the eighth wonder of the world. Who knows, got it. Who doesn’t, pay.”
Of course, this is for demonstrative purposes only. All stock market investments carry risk, and that 9% return long term average. What happens over a year or two is anyone’s guess.
So I would definitely invest for the long term, just like Buffett.
Play your own game
Around nine million people in the UK have no savings, according to research from the Money and Pensions Service. Meanwhile, some lucky people start with a lot of money.
Everyone’s financial situation and goals are different. As Buffett wisely said, “Games are won by players focused on the field – not by those with eyes glued to the scoreboard.”
So I have to play my own game, at my own pace, in a time frame that suits me. And without worrying about other investors’ scoreboards.
Rome was not built in a day
It takes time to accumulate a lot of money through stock market investments. That’s why The Motley Fool encourages holding stocks for the long term rather than continuing to trade.
As Warren Buffett has proven, the ingredients to building wealth are consistency, patience, and finding the right investments.
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