The Power of Compound Growth To Build Wealth
When I was a math teacher, I often gave students puzzles or riddles to play with for the first few minutes of class. One of my favorites is this:
Imagine you have a circular petri dish for growing bacteria. You place a small sample of magical-fast-growing bacteria in the dish, and the bacteria doubles in volume every minute. If you put the first sample of bacteria in the dish at 1 p.m., and the petri dish is full at precisely 2 p.m., at what time was the dish half full?
Think about it for just a moment before looking at the answer. Anyone can do this, you just need to try.
If you are doing crazy calculations, complex math, diagraming a word problem, or need to count on your fingers as I do, then you are doing it wrong. If you don’t know, take a break. It is a riddle, so the answer must be simple.
Have you got it? Okay, here is a hint. The bacteria doubles in volume every minute. If the dish is full at 2 p.m., when was it half full?
The dish is half full one minute before 2 p.m.
What does this have to do with debt and investing? Everything. Bacteria grows exponentially. So does money. Money invested tends to be worth more over time, a principle called the Time Value of Money.
This is one reason the rich get richer and the poor stay poor. Wealthy people have money that, if invested wisely, grows exponentially. You need to make sure the same is happening for you.
The problem is that this exponential growth is most effective over a long period of time. Instead of doubling in volume every minute, like bacteria, money invested at a rate of 10 percent would double every 7.2 years.
If your bank account is “full” when you reach $5 million, when will your account be half full? 7.2 years before then. If your account is “full” at age 50, then you were likely halfway to your goal at 42.8 years of age.
But it works in reverse with credit cards. It is the same phenomena when you take on debt, only now you are paying out compound interest and the time value of money is working against you. And at a much higher interest rate. With unpaid credit card debt, you are getting exponentially poorer and poorer.
Wealthy people use the time value of money to their advantage, while the poor are often taken advantage of.
Student loans can be especially devastating. The average college student with a bachelor’s degree graduates with over $28,400 of debt. If invested over forty years, that’s $798,914.13 in lost wealth.
I’m a fierce advocate for education, but remember that a student loan is just a small business loan in disguise. What is your business plan for taking on $28,400 in debt? Will it help you establish a solid career or teach you how to think deeply and critically? Don’t take on a business loan to play beer pong.
I often meet clients who struggle under $100,000 to $200,000 in student debt—and it cripples their lives.
The time value of money principle shows that the longer the time horizon you have to invest, the more money you are likely to make. And the longer you stay in debt, the more money you lose.
If you wait and don’t start fixing your finances immediately, things will only worsen.
This is why so many people end up delaying retirement—they run down the clock. They are trying to make up for lost time early in their careers, while also lowering the number of years their retirement money needs to last, meaning they need to work harder and longer than they’d like. A rather morbid calculation, but one that too many must face.
To build a solid financial future, make a resolution this year to ensure that exponential growth works for you, not against you.
The information contained herein is intended to be used for educational purposes only and is not exhaustive. Diversification and/or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions and/or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
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