The Great Flywheel of Personal Finance

deviles peakI’m still reading through the book, Good to Great by Jim Collins, which talks about the factors that companies that went from being average to extraordinary and then greatly outperformed their peers had.  One of the things noted is that none of the individuals at the companies during the transition said that there was one pivotal event where things changed.  Instead it was a lot of little things done over a long period of time.  Some of the changes took many years or even a couple of decades to occur and the press didn’t take any note of the company’s successes during those initial years.  Then, in the later years when things suddenly started happening, it was reported that the company’s success was sudden and “out of nowhere.”

Collins likened the behavior of the company to a person pushing an enormous flywheel.  The first time you push, it seems like nothing really happens.  The same goes for the second and the third time.  As you keep pushing, however, the wheel begins to build up speed.  Suddenly the wheel has momentum and with each new push that momentum grows a little more.  After a while it seems like the wheel is unstoppable and that the pushes you give really don’t matter because the momentum of the wheel is so great.  At that point it seems like the wheel could continue to turn forever.

The companies who made big changes, or that bought out other companies to grow, or that developed some “great new strategy” or who hired some “great new leader” weren’t the ones that made the change from good to great.  It was the companies that kept on pushing the wheel a little at a time, always in the same direction, until it built up speed.  As the company gained momentum the success of the company started to become addictive, where everyone was excited and wanted to go along with the ride.  They knew that they were involved in something great even though nothing significant had seemed to cause it.

Personal finance is really the same way.  When you make your first investment of a couple of thousand dollars, it is like pushing on a huge, twenty-foot diameter, three-foot thick, solid steel flywheel.  Your effort appears to do nothing and the increase in income you get from your investment is negligible.  Maybe you make a couple of hundred dollars per year from your nvestments, while you make tens of thousands of dollars in salary.  If you keep pushing, however, always in the same direction, investing little bits at a time as you have the money available, the momentum starts to grow.

If you can reinvest the money your investments generate, such that the more momentum the wheel picks up the more it pushes itself faster, the wheel picks up speed even more quickly.  After decades of pushing this wheel it seems unstoppable.  At that point you can make withdrawals from your portfolio and they are instantly replenished.  So long as you don’t withdrawal more than your portfolio is earning, the wheel will keep getting faster and faster as its own momentum pushes it to ever higher speeds.  Around retirement time after a lifetime of investing you can withdrawal hundreds of thousands of dollars per year and still the wheel keeps spinning and doesn’t slow a bit.

Just like the people at the companies that went from good to great, you won’t be able to point to any particular time that you invested that made the difference and really got things going.  There might be some good bull markets along the way that give your portfolio a big lift, but over many decades they’ll be lost in the noise.  So start your flywheel going today and make sure that you’ll be applying little pushes regularly through automated transfers from your bank account to your investing account.  Don’t worry about the little bobbles along the way like the current bear market.  Don’t worry if it seems like nothing is happening.   Just know that if you keep pushing in the same direction, eventually your portfolio will gain momentum and become unstoppable.

It all starts with a little shove on the wheel.

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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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