Friday, August 10, 2018

Rule of 70

Compound interest is a magical thing. If you divide 70 by the real return you can achieve on your investments, you get the approximate 'doubling time'. So, left alone, 7% real return would double the size of an investment in about 10 years.

Time makes all the difference

I believe in building Engines. The old rules divided us into homemakers and bread-winners. I don't like thinking of people as purely productive assets. As dishwashers and cash machines. We aren't things. We aren't jobs. We certainly don't exist as tools to pay the bills.

An Engine that earns more than you spend can set you free. You may choose to carry on doing exactly what you were doing before. Just knowing you have options changes the story though.

If you got to the point where you and your Engine were earning the same, but instead of not working you carried on.... magic happens. As long as you cover your own expenses and don't harass your Engine, it will carry on growing. 

Depending on how fast, eventually your Engine will be able to set you... and someone else... free. If it grew at 10%, you'd have an Engine that was twice as powerful in 7 years. If it grew at 3%, it would take about 23 years (70/3).

But here is an important point. An Engine isn't a big pool of coins in Scrooge McDuck's mansion that you can swim in. The masterstroke is that wealth only grows if it is doing something useful. The Richest people in the world don't 'have' the figures we see of their wealth. These figures are guesses of the present value of their Engines. Like a guess of your future earnings from your job. But like you, the Engine has to go to work. In factories or businesses that make real things, or do real things, for real people.

Investing isn't hoarding. It is problem-solving. People aren't problems to be solved. Done right, investments can do the problem-solving so people can do the people-loving.

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