Compounding Self-Interest

Here are a few things smart people said regarding interest and self…

Compound interest is the eighth wonder of the world. — Enstein

and…

People look for expressive and emotional benefits beyond the mere utilitarian (profit maximization in their investments — proof of intelligence, evidence of success, ego-gratification — none of which has anything to do with their portfolios returns — Meir Statman

Now that I’m done googling the word “utilitarian,” I’ve got some thoughts are how these two quotes are related.

I don’t have a pension. I don’t have a guaranteed retirement. Dolla billz is something I’d definitely like to have more of. So in my pursuit of financial literacy, I discovered the importance of compound interest.

It’s the idea that your money can make you money. It’s the magic that made a few hundred dollars invested in stocks during the 1930’s worth over a million dollars today. (Now go yell at your dead grandpa for not setting aside a few hundo for you when he turned 18)

Compound interest is magic, and now that I understand that, I’m focused on that nest egg. I want to see the flywheel start spinning. I want my bank account to go from good to great. For this reason my wife (Ariel) and I are pretty obsessive about saving. We live on less than 60% of what we make, and now, because we’ve both witnessed the power of compound interest, it has actually become easy to say no to dinners and drinks out, and say yes to crock pot taco night…again.

But as we’ve set our eyes on collecting, we’ve noticed that if we’re not careful, our self-interest compounds too. And that’s where the second quote comes into play.

Ariel and I decided a long time ago that we want our lives to count. We both spent close to five years working in the nonprofit world, and now that both of us are employed by for profit companies, we’re having to be really intentional about making sure we don’t just work and play for ourselves.

Meir Statman is an expert in behavioral economics, and he has dialed into our duality — our pursuit of wealth so easily teeters between two motives:

  1. The first is a desire for wealth so that we might prosper others too. Ariel and I have a genuine hope that one day we’ll have enough wealth that extravagant acts of generosity are nothing more than a drop out of our bucket.
  2. The second desire however, is the hope that somehow our wealth will prove our intelligence, will display our success, and satisfy our own egos. None of which really has anything to do with money, but is a larger human issue to prove out dominance.

The accumulation of wealth takes discipline and focus, but the risk of compounding self-interest scares me. Fortunately there are some amazing people in my life that can help me check maself before I wreck maself…

I remember being in Tahoe for a work trip with a friend I look up to. We were being toured through a resort where our company will host its conference this fall. After being spoiled with things we could never afford ourselves, I turned to him and said, “ Do you ever just want to be rich?” He replied with words that I’ll never forget, “I am rich. I’m here aren’t I?”

To my knowledge he’s no millionaire. He has however, learned to derive his satisfaction from the moments of life that can’t be regained. He has learned to view prosperity as a provision of the people he’s with and the experiences he has to enjoy.

The whole point of compounding-interest after all, is that it takes care of itself.

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