Understanding Compounding Income & The Tail End

Taking Returns & Reinvesting to Build a High Velocity

You can go to my website and access the Freedom Mapper calculator. 

Let’s imagine you start with a small lump sum of capital, $100,000, and you break it up into pieces and put it into a series of investments which deliver, let’s say, 10-12% net return or net cash flow per annum. 

Each year you get $10,000-$12,000 off that just as simple interest. That’s a nice little lump sum that you could earn over time. 

Most of the people that I work with are business owners who are in a position where they’re running their businesses comfortably. They’re not necessarily in a huge rush to exit the business, but they have some kind of runway where there’s an intent to either exit, reduce intensity, or extract themselves and keep the business – so some permutation of wanting the freedom to choose how they spend their time within, say, 2-5 years. 

Now imagine that $100,000, where at the end of every year, you took it and you reinvested it. When I say reinvest, I mean you took that $10,000-$12,000 and you put it back into investments that were also going to be earning you that same rate of return. 

What starts to happen is that those returns start to not only compound, but you end up in a situation that because you’re reinvesting your returns, you’re compounding your compounded return.

Difference Between Reinvesting VS Not Reinvesting

Now this is something that some people understand, but if you refer back to my episode on the velocity of money, the difference between reinvesting those returns and not reinvesting can often be exponential, so I’m going to run it through my calculator in front of me so that I make it really clear. 

If I have $100,000 and I allow the $12,000 to reinvest every year just, by the end of year five, that same $100,000 will be throwing off $21,000. 

Now, assuming you put it into a strategy or an alternative investment which will continue in perpetuity, or you redeploy it into different investments that continue to give you that 12%. But in year 5, let’s imagine that you pull up stumps and you say, “I’m going to start taking my income off the table every year.”  

Now $21,000 starts to give you an insight into how you could be thinking about opportunity cost. 

So the way to understand this concept of “tail low” is in the first year that you had that $100,000 it was earning you somewhere between $10,000  to $12,000. In year 5, it’s earning you $21,000. So you’ve more than doubled that income stream, simply by reinvesting. 

None of this is particularly complex mathematics or rocket science, and yet so many of us make investment decisions without taking into consideration this concept of the tail end.

Not All Investments Can Increase Your Velocity of Money

Unfortunately, there aren’t a lot of investments that allow you that ability to increase your velocity. 

For example, with Australian real estate, it’s not common that the cash flow we receive from our investments is worth all that much to start with, but that we can then accumulate and buy more property. It’s really, really tricky.

But in the alternative investing space where the minimum amounts of money that you need to do another deal are not huge, you can see how this concept of velocity of money really starts to make things exciting. 

The real point about compounding income, increasing your velocity and this whole idea of a “tail end” where you’re really getting a really high income stream by the time you need it, is that it’s a game changer for people.  

Now multiply that $100,000 by, say, 5 and you can start to see that you’re really exceeding a 6-figure income off a starting balance of something like $500,000. 

The Tail End of your Investment Journey 

So the point of where I’m going with all of this is, you need to think about what you want when it comes to being aggressive with your investing.

You need to understand what the tail end of your investment journey looks like, and whether it’s going to get you where you want to go.  

I’m a huge advocate of projecting your income streams, your capital, into the future. Not too far into the future, I really love that kind 5-year timeline as a medium-term outlook. 

Client Case Study 

I have a client right now who is in the situation where they’ve been under the wing of a traditional wealth planner who has had them wholly in shares, and they’ve dabbled in a little bit of property on the side.  

They’ve reached the point where their runway to retirement was pretty short. He was feeling quite worn out. He was approaching a traditional retirement age and he was really looking for outside the box thinking on how to bridge the gap.  

Now this guy definitely struggled with the idea that he and his wife were going to have to compromise their lifestyle in retirement. He was especially anxious that the business that he ran was not saleable, so it wasn’t going to give him this huge capital injection as he got to retirement. And effectively the way that it was going to pan out was he was going to have to shut up shop.   

This is what he’s managed to achieve very very slowly over a period of about 2 and a half years. He didn’t have a whole lot of cash sitting around. He has gradually shifted some of his hard earned capital into alternatives, with the idea that the tail end was going to get them where they need it to. 

So they had quite a substantial income gap to bridge, and had they not bridged that gap, they would have ended up in a situation where they probably would have had to sell their house, which like many people, has a lot of lazy capital in it and downsize to something that was more affordable to free up some capital.   

The situation now is that by reallocating some of their hard earned capital into investments and strategies which offer higher income, they’ve managed to bridge that gap and keep the large bulk of their share portfolio intact.  

I think the thing to understand, particularly when you’re playing with your own numbers and trying to work out what you need to do to get where you want to be, is to think about this concept of what tail end you want and then reverse engineer.   

The other thing is, if you can acquire assets which allow you to take chips off the table and reinvest, then again, you’re going to be doing a massive amount to accelerate your income stream.  

Understanding the Concept of Compounding Income

This idea of compounding and tails is certainly not a new one. I’m not reinventing the wheel, and I’ve touched on it in different ways in past podcast episodes.

The thing that I really want to drive home here, is that if your runway to wanting to be master of your time is short, and I’m saying short as in that 2-5 year mark, and you are looking for a way to bridge a gap that if you took no action would otherwise leave you with a chasm, then understanding more about this concept of compounding income is really important. 

Getting your head around this world of alternative investments where your capacity to generate strong, predictable income is absolutely essential. 

I am talking to more and more investors who have done all the right things by the investing playbook and they are still not where they need to be. I genuinely feel that this concept of a 45 year retirement is becoming more and more redundant.

The most important currency of the century that we are in is actually ownership of time and the capacity to direct your efforts, to have impact in the way that you want, rather than running businesses and earning income because you feel you have to.

Final Thoughts

If anyone has questions about this or they want to access that calculator to have a play with on their own, it’s a free tool on my website and it definitely gives you insight into what this tail end means and why the concept of increased velocity is so crucial.

If you’re a business owner feeling frustrated that despite doing everything right in the property investing playbook and you’re no closer to financial freedom, then head over to www.inkosiwealth.com to learn more about how you can use alternative investments to catapult your investing income and blend strategies to shave decades off your timeline to financial freedom.

If you’re interested in understanding how to create wealth through alternative strategies,  please check out my programs, where I help you catapult your investment income and blend strategies to shave decades off your timeline to financial freedom.

Or, you’re welcome to get in touch today, book a call with me, and I would be happy to talk you through it – no obligation!