Do you think long-term, or short term? Before you answer this question, take a second and define what “short-term” and “long-term” means to you. How many years into the future is short-term? How many years into the future is long-term?
Most people would define short-term as the next 3 to 5 years and long-term as 15 to 20 years. Well, when I study the richest families throughout history I’ve noted they think differently about these time frames. In fact, the richest families throughout history seemed to view short-term thinking as 20 to 30 years and long-term thinking 50 to 100 years.
Why would someone think 50 to 100 years into the future?
Because these families realized this shift in thinking has a profound impact on the decisions we make today with regards to money and investments. This shift in thinking may also have a profound impact on the decisions you and I make today.
As an example consider these two questions:
1. How do I achieve financial freedom?
2. How do I achieve financial freedom for myself, my children, and my grandchildren?
See the difference?
The average person thinks the first question is long-term thinking because they are thinking 15 to 20 years into their future. The person who moves past this time frame and thinks about future generations is really thinking long-term. This person will make different decisions based on this generational thinking.
In the book, “Family Fortunes“, by Bill and Will Bonner I found the following:
“In America, each generation is expected to make it on its own. At least, that is the idea. So old people think they are quite within their rights to spend all their money on themselves, leaving little for their heirs to inherit. They do not see themselves as selfish… They go around with T-shirts that say, “I’m spending my kids’ inheritance.” Instead of taking care of grandchildren or helping their sons and daughters with the family enterprises, the retire to Florida, organizing their financial lives so their money lasts not a minute longer than they do.”
This seems crazy to someone who truly understands the power of compound interest. If time is used to our advantage, we can have a dramatic impact on future generations of our family. The trick is truly thinking long-term. This means we have to look 50 to 100 years into the future. This is significantly different than thinking 15 to 20 years into the future.
As an example, someone who truly thinks long-term might decide to set aside $5,000 today for the family to compound for decades. This person decides to open up a Vanguard account and uses their $5,000 to invest in the “Vanguard Small-Cap Index Fund Investor Shares.” They select a small cap fund because they know over long periods of time small cap funds outperform the market. If this fund averages 10% a year over the long-term, this $5,000 investment for the family will become:
$586,954 in 50 years
$1,522,408 in 60 years
$3,948,734 in 70 years
$10,242,001 in 80 years
$26,565,113 in 90 years
$68,903,061 in 100 years
See how powerful “true” long-term thinking can be? Putting aside $5,000 today can setup several future generations of your family. Sadly, we won’t get to see this happen as most of the growth will occur after we’re gone. You plant the seed today and your grandchildren get the harvest. You simply decide to think long-term and to use this time to your family’s advantage.
Note: The figures above were calculated without factoring in inflation. Inflation is going to happen regardless and it is easy to see this $5,000 investment held for decades will reap enormous rewards for your family.