Economics and How to Live Comfortably

How to become economically independent - You want to act like you are independently wealthy. Open a savings account. If you work for your income then take 10% of each paycheck and put it into the account. This is very important: when the account makes interest put the interest into the account. Of course never take funds from the account and never spend the interest it makes.

Here is an example: Suppose you make $100 per week, and you have a savings instrument that pays 10% per year compounded weekly. Suppose also that you place 10% of your income into this account each week. If you start this at age 20 then at age 60 you will have $277,621.91 in the account, and at age 70 you will have $762,851.73 .

You may well say, "That is great but I am not 20 anymore, and now I am unable to create the wealth before I die". That depends on how long you wait. If you are say 30 you can still achieve this. Note that from the spread sheet at the end of 10 years, the 20 year old would then be 30 years old and have $8,921.50 in the account. If you could at age 30 have that amount in the account by any method you could be in the exact same place as if you had started at age 20. Perhaps by now you are making more than the $100 a week made by the 20 year old. That should allow you to put 10% of your current income into the account and catch up.

But don't wait too long. Notice in the example above the gain from age 60 to age 70 is $485,229.82. Not bad for 10 years. However the gain from age 30 to age 40 is from $8,921.50 to $33,149.37 or an increase of $24,227.87. Again not too shabby for 10 years but nothing like the $nearly half a million from age 60 to 70. Why the big difference? It is because of the compounding interest. Then again what good is half a million at age 70? Well that is a different question, perhaps to be addressed elsewhere.

You might also point out that savings accounts don't make 10% a year but are designed as a hedge against inflation and maybe only...