Dad's picture
6
May
16

You Can't Catch Me: How To Be Wealthier And Smarter Than Others

Crafy RunnerThis is a post about urgency, about teaching yourself and your children the cost of wasting time. There are some numbers, but don’t worry, they are not complicated and you can ignore them if you like. The message is that, in almost any activity, wasting even a little time causes huge financial and educational losses compared to those who don’t.

You Can’t Make Up Time In a Race

I run one or two marathons per year, having run 8 so far in my life. People starting out as a long distance runners sometimes think the impossible is possible, and sometimes it is but there is one thing isn’t. As I trundle past mileposts 20km, 25km, 30km, I always become a believer. I begin to believe that I can take a rest. Just a tiny rest. Maybe to walk for just a minute. I’ll be able to make up the time when I’m more fresh from after the rest. After all, it’s only one minute. The trouble is that I’ve tried this eight times and it hasn’t worked once.

Here is an example to help you understand why: A marathon is 42 kilometres or 26 miles. I can run that far in 3 hours 30 minutes, which was among the top 15% or so of all the marathon runners in my last event. Suppose I was racing someone 10% faster than me. This is much faster, she would absolutely slay me and place in the top 5% of marathon runners. Now, suppose she gave me a five minute head start. How long it would take her to catch me, making up just those five minutes? She’ll have to run for 45 minutes, covering 10 kilometers at her amazing speed, before she passes me to make up those five minutes. Even though she is in the 95th percentile, and I am only in the 85th, I could hold her off for a quarter of the race if she slacks for only five minutes. If she loses twenty minutes, then it’ll be a photo finish, and if she loses twenty-three minutes then she won’t even be in sight behind me as I cross the line.

Even Worse: You Can’t Make Up Time in Money

Running is linear, meaning that you run at the same speed each kilometer. If you were surprised at how hard it is to catch someone in that example then check out how crazy it gets when we talk about things like money.

Money accumulation is exponential, compounding. If you get 5% interest at your bank then, given a $100 deposit, the bank will pay you $5 for a total of $105. The next time the bank pays you, they pay on the $105, so you’ll get $5.25 instead of just $5. A quarter more doesn’t seem like much, but it is huge over time. Have a look:

Suppose you and your friend can get a 5% interest rate from the bank. Now suppose that you decided to save and invest $10,000 per year for 10 years (total is $100,000).  After ten years you never put another dime in. Now suppose your friend decided to wait for 10 years and then invested $10,000 for 20 years (twice as long as you, or $200,000). Seems like your friend should have a lot more money than you, right? Especially since he invested twice as much!

Ten years of saving versus ten years of waiting.

Wrong! You will both have the same amount of money after the 30 years, except that you will have saved hard for 10 years then relaxed for 20, while your friend relaxed for 10 years then saved hard for 20 more. The time your friend wasted at the beginning caused him to work for twice as long to catch up. If the interest rate was anything over 5% then your friend could not hope to catch you within the 30 years.

Here’s another graph. This time the interest rate is 10% (a little high for today, but let’s go with it). You and a friend deposit $10,000 one time, except you do it today and your friend does it two years from now. Note that each of you deposited the same amount of money, and within two years of each other.

Waiting for two years.At retirement, in 30 years, you will have $30,000 more dollars in your account than your friend will have. This $30,000 comes from acting only two years earlier on only $10,000 -- just a blip in time over 30 years.

Some more cool facts:

  • Procrastinating that deposit by one day is worth about $45.
  • By 35 years the difference is almost $50,000, by 40 years it is almost $80,000.
  • If the interest rate was 11% (only 1% more) then the difference is  $43,000 after 30 years instead of $30,000:  Almost 50% more!  Small advantages get magnified by time.
  • In the third year the difference in total savings was only $2,310, yet that relatively small difference grows to $30,000. Small advantages get magnified by time.

Worse Again:  You Can’t Make Up Time in Learning

Learning has exactly the same compounding processes as money. Educators know that one of the biggest contributing factors to ease of learning is something called “Prior Knowledge”, which is essentially what the student already knows. It’s obvious. If a teacher is covering addition in class then the student who doesn’t know numbers is going to have a much more difficult time than the student who does. And the student who already knows how to add on the fingers is going to be better off than the student who only knows how to count. Right up to, of course, the student who already knows how to add will have no trouble at all.

Just like the money example: A child who learns how to read or speak or count or whatever even just a few months earlier can accumulate huge advantages by they time they get to high school and adulthood. These advantages are much greater than you may suspect.

So What Do We Do With This Knowledge?

DO NOT WAIT!

Or, if you do wait, understand what you are losing. If you decide to deposit that cheque tomorrow because you want to watch American Idol today, know that you are paying $45 for that choice. On the other hand, if you get yourself to the bank to make that deposit then it’s like you earned $45. Wait a year or two to “get around” to learning how to invest and you lose $30,000.

 

By starting earlier and going steadily you can overcome almost any handicap you have relative to others!

The rich get richer, and poor get poorer. Students who are behind get further behind, students who are ahead get further ahead. It’s not an unfair. It’s not even surprising. It comes out of what we covered above.

In a post last week I document how my wife and I have earned $800,000 over our 10 years of marriage. One of the main ways we did this is we always acted, every year, every month, every day. Whenever we saw something that could bring us towards our goals, we investigated and pursued. Many times we lost, many times we gained, but early and constant action that got us to where we are.  Our friends earn nearly twice as much as we do, but we have about twice as much or more wealth as they do.

Children who are strategically taught a few things early on, especially reading, will build up such a compounding advantage that they will either be able to sail through Jr High and High School, or continue their growth to destroy big pieces of the competition for jobs, wealth, and opportunities.  I learned to like reading very early and the result was that I already knew almost everything that was taught to me up until Jr High.  I had read it all before on my own.  When we got the textbooks I always read ahead since I was bored in class.  Unfortunately, I didn't learn to keep that advantage and instead became lazy, maybe because of the tedium of school.  I ended up spending about seven years of these gains between high school through my first degree by just doing enough to get by -- I skipped school almost half the time.  A kid who knew everything in advance by Grade 7 was barely passing by final year of university.  I figured out what had happened by the time I took MBA school and applied myself again.  Unfortunately I was now back on par with the rest of the MBAs and I only got the third highest GPA in my class.  I'm back in form now, reading about two books per week, mostly non-fiction about inveesting, philosophy, parenting, etc, but I still battle the scourge of procrastination and I sometimes regret that I didn't do more with my potential.

Waiting a week to teach the child how to count could be the difference between merely a high school diploma and a PhD 20 years down the road. It is urgent today, an emergency even: Do what you can now! Do not wait until tomorrow!

The good news is that the vast majority of the population don’t get this. People think that almost anything can be pushed off until tomorrow without penalty just as I didn't get it. Therefore, although our marathon runner and early investor win out each time, most people don’t. If you find yourself a little behind today then you have a change to make the most of your time going forwards. Invest now. Learn now. Teach your children now.  They will become many times wealthier because of it.

Practical Suggestions

  1. Open an investment account TODAY.
  2. Teach your child how to read or write one new word TODAY.
  3. Open Google Finance and look up the stock of one product you like TODAY.
  4. Go to the library and borrow one book on a topic you are interested in TODAY.
  5. If your child is older, help him or her do tomorrow's homework TODAY.
  6. Walk down the street, find a local business, ask for the owner and chat him or her up to find out how the business works TODAY.
  7. With your child think of one easy skill that you each want within 1 month, write then down, work backwards to figure out how to acquire them, then start TODAY.
  8. Take a book with you everywhere you go so that if you have five minutes you can learn something.  On the bus, on the toilet, waiting in line, before bed.  Do this TODAY.
  9. If you're shy, go to a public place, pick one random person and find out something about them TODAY.  If your kid is shy then go grocery shopping and make the child ask someone where the "Grey Poupon" is, or the "Escargot" if they know what Grey Poupon is, or Calamari, or Caviar, or Vermicelli, or Coconut Milk, or Tikka Masala, or Anchovies, or Fiddleheads, or Durian, or whatever else until they don't know what it is and need to ask.
  10. Comment on this post, Like this post, and Tweet this post NOW!

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Comments

Alex

paul wolfe's picture

Alex

 

Cool post.  Einstein said that compound interest was the most powerful force in the universe.  And of course it applies to the acquisition of talent as per our discussions on talent!  Been meaning to get over here for a while, glad I did.  Now I'm off to check some of your back catalogue!

 

 

Paul

 

 

 

 

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