Not to bore you with math, but investing is math. Hoping for a stock to get to some price is just that, a hope. It’s qualitative, not quantitative. Collecting income from all areas of your portfolio—even that money your nephew owes you—is quantitative. You can actually see it hit your portfolio, your bank account, or your wallet.
When I think about the magic of compounding money, I think about math. It’s simple. You get paid like you did from your nephew. You got back what you lent out (though maybe you didn’t expect it) and usually some interest. But because he’s your sister’s son, you don’t charge interest.
Ah, interest. That magical word we’re taught about in school with time value of money math, present and future values. That can be the math where one says, “Self, this is confusing. I think I’ll go out with my friends and do it this weekend.” But then the weekend comes, the game is on, and thirty-five years go by, and that weekend hasn’t come yet. And this weekend? Forget it. It’s going to be beautiful outside.
Then we have the math of relationships, which can be even more confusing: one plus one equals three. Something about synergy, right? Which is a lot like compounding a significant other’s interests.
Remember that coin collection you had when you were a kid? How it became books of coins you were proud to see grow. It didn’t pay any interest, but you did. Your dedication taught you how to compound something. And before you knew it, you had something to show for it.
When it comes to interest on interest, it’s your assets doing the heavy lifting for you. Over time, it’s magical, but in reality, it’s all the worker bees making it all happen for the company you’re an owner of. The worker bees might not think it’s magical at all. They’re showing up day in and day out for themselves, but you have a stake in the business.
Action Line: Understanding the math of interest on interest can be hard. Thankfully, we’re smart enough to know that math works even if we don’t always understand why. When you want to work on the math of investing, let’s talk.
Investing Is Math
E.J. Smith - Your Survival Guy
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