Exponential FI

You are saving money and learning about the difference between assets and liabilities . As you invest your savings into assets, the real magic begins. Your investments start to grow, whether it be from appreciation, cash flow, dividends, or all of the above. Then the growth starts to growth. Then the growth on the growth on the growth starts to grow. It’s a runaway chain reaction, but it does take time. This is the magic of compounding returns and leads to exponential growth of your wealth, the namesake of this blog. However, the opposite effect is just as powerful. Anyone who has ever been in credit card debt with interest rates over 20%, or even worse situations with payday or title loans, understands how hard you have to swim against the current just to stay still. The interest keeps racking up and many people never escape the debt. If this describes your situation, check out Dave Ramsey’s Total Money Makeover for steps to dig yourself out of debt before you start b...

In 2008 you could famously buy a foot-long sub for $5. In 2020, that same sub costs $6.75. As we look at generating enough passive income to cover our future expenses, we must not just think of how many dollars we will have, but how many sandwiches those dollars can buy! The difference between those two prices is the difference between a nominal price and a real price. Similarly, if we hide $100 under the mattress today, a decade from now we will still have $100 nominal dollars, but will have fewer real dollars, because we can buy less sandwiches with the same money. The green line shows the average price of sandwiches rising over time, with the shaded area projecting 30 years into the future based on the same growth rate. The blue line shows how the number of sandwiches we can buy for the same nominal money decreases as a result. While sandwiches are an illustrative example, this effect touches all goods and services and is known as inflation. In the US, Consumer Pri...

You have started your journey towards Financial Independence and are stashing away money, having found some space in between your income and expenses.  But what do you actually do with that money? It is time to put your money to work for you.  You want to invest your money into assets, which will make you more money.  At the same time, you want to avoid locking it away in liabilities, which will diminish your money.  What’s the difference?  To put it simply, if you lost your job tomorrow, assets would feed you while liabilities would eat you!  Understanding the difference between an asset and a liability is critical to Financial Independence. Key asset classes: Equities When companies issue shares of stock, they entitle the owners to a share of the equity in that company.  Generally, when those companies make a profit, they will reinvest some of the profits to help grow the company and pay the rest out to the shareholders in the form of divi...

Financial Independence, simply defined, is when your passively produced income is enough to pay for your life’s expenses.  But how do you get there?  When at the beginning of the path, it can seem daunting.  Even imaging enough wealth to generate that kind of passive income is a challenge.  However, the good news, and the real point of this blog, is that the decisions we make along this path drive non-linear results. A mathematician would tell you that a linear function is defined by the output being directly proportional to the input.  Your elementary school teacher would say they make a straight line on a graph.  Fortunately, on the quest for Financial Independence, we leverage the power of non-linear mathematics.  Maybe the most powerful, the exponential effect of compound interest when investing, we will get to later.  However, it starts with the disproportional effect of saving versus spending.  Let’s ex...

Ok…so you didn’t pay that much attention in math class. You kept asking “when will I ever use this in the real world?” and nobody gave you an answer. Well, math’s time has come. It is a powerful tool you can wield to benefit your personal finances. In this blog, we will talk about the fractions, percentages, probabilities, and exponents that can free you to do what you love - even if that’s nothing at all. However, my goal is to walk you through it. I will explain the concepts and provide the math you need, all in place.