An article made the rounds with a particularly provocative title: “If You Have Savings In Your 20s, You’re Doing Something Wrong”
One commenter identified the most obvious counterpoint in a manner suggestive of its obviousness:
DO YOU NOT UNDERSTAND COMPOUND INTEREST?????????
The spirit of the article was strong. But it's no surprise that not addressing compound interest invited a deluge of criticism. I also think leading with an image of a bunch of attractive young adults over-enjoying the thrills of their stationary vehicle probably didn't help drive home the more serious tenants of her message.
As a similar spirit is guiding my own personal financial decisions at the moment, I have spent a great deal of time considering the doctrine of compound interest. I am in clear violation of an established financial law: Start saving money as early as possible! Financial advisors and pop writers may have areas of disagreement, but the one point they wouldn’t even consider debating is exactly in the area I’m deviating. And, yes, I understand the math. But I also understand that there are other avenues towards wealth.
The fact that the law of compound interest coexists with the law of going to college should be your first clue that something is amiss. College is a huge investment, of critical years and lots of money. Compound interest working against you. And yet canon holds that you make that investment without blinking.
But then suddenly you graduate from college and the algorithm changes. As if having a college degree is some magical variable that flips a sign. While before it was fine to dump tons of money into compound interest working against you, suddenly it becomes absolutely imperative that you must start shoveling money into compound interest that works for you.
Unless, of course, you decide to go back to college. If you tank even more money into compound interest working against you for your graduate studies, it’s socially acceptable. The sign flips again.
Clearly, the social dogma here is built on a misguided foundation. If the investment of going back to school can bypass the canon of compound interest, so can others. Degrees do not have enchanted powers that circumvent the laws of physics or mathematics.
I understand where this delusion comes from. It's a logical fallacy. It's because these things can be measured. Because we can have neat little one-liners like "If you go to college you can earn $X more money in your lifetime!" Because it’s easy for a financial advisor to pull open a spreadsheet and show me how compound interest can work with me over time. So after making my big investment in college, yes, that spreadsheet looks better and better as N years is increased. Of course that number at the bottom is bigger if I start putting away money at 22 instead of 29. Do you understand compound interest?
These easily measurable and calculable things are not the sole arbiters of your future wealth. There is some safety in them. They can yield certain guarantees. But they are not exclusive.
The self-selecting audience that’s made it this far into this essay likely doesn't need these guarantees. In fact, its comfort might do more to limit your career than to enable it.
Currently, I am not saving money for the long-term. I am aggressively reinvesting in myself. My financial quarterlies look like Amazon’s: If you’re seeking short-term financial gains, look elsewhere. I am in it for the long haul. I am building something special here.
Financially, the bet is that I can “beat” compound interest by investing in myself as opposed to a mutual fund.
Professionally, the bet is that I can build a career I love. And faster.
Personally, the bet is that I am living out fulfilling experiences during a unique window. And that I’m growing as a result at a critical period.
If anything, there is a more intangible “compound interest” at work here. I feel as if I can’t afford not to invest in myself at this young age, with N still so great.
I like the upsides of this bet. And I’m confident in my chances.