Imagine you have $10,000. You are presented with two potential futures::
- Future 1: Your money grows by 10% in the first year, then multiplies 10x (10-fold) the following year.
- Future 2: Your money multiplies 10x in the first year, then grows by 10% the following year.
Which future leaves you with more money?
This is not a trick question. In either case, you will end up with the same $110,000, as shown in the picture below.
Let’s break it down:
- Future 1: $10,000 + 10% = $11,000. $11,000 x 10 = $110,000.
- Future 2: $10,000 x 10 = $100,000. $100,000 + 10% = $110,000.
So, if the final amount is the same, does it even matter? Absolutely! It’s not just about the amount of wealth, but when you acquire it.
Early Wealth Brings more Happiness
Future 2, where your wealth grows rapidly upfront, offers significant advantages: more security, greater peace of mind, and early access to opportunities that come with wealth. A lot of rich people are frugal. They spend just as much as poorer people, but knowing that they are wealthy is priceless. If we get technical, two people who spend the same amounts on the same things should have the same objective wellbeing. Even if this were true, there is a vast difference in the experiences of someone who knows that they are rich vs. someone who feels poor. This difference affects our subjective wellbeing, more commonly known as happiness.
The Reality of 10x Returns
Now, let’s talk about those growth rates. A 10% annual return may be achievable through stock market investing. But a 10x return in a single year? That’s a different story.
Extremely lucky investments can produce 10x in a year, but these are rare and completely unpredictable. On the topic of predictability, here is a funny and instructive story told by investor Howard Marks:
I tell my father’s story of the gambler who lost regularly. One day he heard about a race with only one horse in it, so he bet the rent money. Halfway around the track, the horse jumped over the fence and ran away.
Howard Marks
If someone believes that they have found an investment that will surely 10x their wealth in a single year, they have managed to delude themselves. And if someone promises you such returns, be very cautious. Remember this wisdom from Naval Ravikant:
There are no get rich quick schemes. That’s just someone else getting rich off you.
Naval Ravikant
The Power of Early Saving
While achieving 10x investment returns in a year is rare, achieving 10x wealth growth in a year is possible, especially early in your career. Consider this example: a frugal engineer, fresh out of a top school with $10,000 in the bank, landed a well-paying job. By diligently saving $90,000 of their $200,000 salary, they increased their wealth tenfold in just one year.
This highlights a crucial point: wealth growth is not the same as investment return. Your net worth doesn’t care whether you grew it by saving or by investing. Early in your career, aggressive saving can lead to significant wealth growth. By maximizing savings during these initial earning years, you can achieve growth rates of several hundred percent. Failing to capitalize on this early opportunity can significantly delay your journey to financial security.
This is why many self-made wealthy individuals prioritize frugality. So, while hitting a 10x investment return in a single year is a long shot, leveraging the power of saving early is a tangible and highly effective path to building wealth.
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