In this blog post, we're going to talk about the true cost of compounding your money for the long term. We're going to look at whether compound interest is the strategy that we should buy into or if we should pump the brakes on this compound interest strategy as it could be prohibiting us from living an actual intentional life.
My name is Caleb Williams. This is the BetterWealth blog, and the purpose of this blog is to make content about money, finance, and business to help you live more intentionally. I'm sharing this post because a lot of the times when you look at personal finance channels, many of us just assume that compound interest is this magical thing. Albert Einstein is credited with saying that compound interest is the eighth wonder of the world. He goes on to say, "He who understands it, earns it; he who doesn't, pays it." There's a big debate about whether he actually said that, but it's one of the most popular quotes attributed to him, so I'm just going to give him credit whether he said it or not.
The whole point is that compound interest is a function of your money growing over time. There's this hockey stick growth, which is just a function of math that says if you're earning interest this year, then next year you're earning interest on your principal and that interest. Every year that principal and amount gets bigger and bigger, and it's just a function over time. It is an amazing thing. Unfortunately, though, when you look at companies, banks, Wall Street, and other institutions, we have to ask the question: should we do what they do or should we do what they tell us to do?
I always like to challenge the status quo. You know, Wall Street and a lot of these businesses and banks are telling us to invest our money for the long term. They set up systems, whether it's CDs or accounts that penalize us for using our money, to motivate us to deposit money. Whether it's banks eliminating fees if we do automatic deposits into their bank or accounts that give us some type of benefit or a company that will give us a match for investing money, they want as much of our money as possible and they don't want to give it up. They're motivated by this concept of wanting our money, and they make a fortune by compound interest.
Are a lot of these companies, a lot of these billionaires making their money off of compound interest, or are they doing the exact opposite? Are they using money and buying cash flow and controlling money? If you just look at banks, which are the definition of being a good steward of your money because banks are just institutions that control our money better than us, banks essentially want as much money as possible. They use leverage and make a killing off of our money, not theirs.
So that's brilliant. They make us put up collateral so they're not taking on any unnecessary risk, and then they're getting a velocity, a flow, and their loans are actual assets. It's an idea of their money in motion, and every loan is like an asset for them. They're loaning it out to different people and getting money all off of our money. They know that since they have all the money, they can make the rules, and the same goes with Wall Street. They're the same way, wanting as much money, but ultimately incentivized on making cash flow based on the amount of assets that they have of our money.
They're not necessarily basing it off of compounding for the long term. They're trying to swallow up as many assets and keep them as long as possible because they know that activity is an asset in itself, creating cash flow. The point I'm making is that compound interest is a function of math. It's an amazing thing, and I think every decision we make has a consequence because of compound interest.
If you follow what we do, we talk a lot about opportunity costs and the difference between good debt and bad debt. All this is really functioning off of compound interest because every decision doesn't just have a consequence on those dollars but what those dollars could be worth in the future. My pushback is that a lot of people buy into compounding, but they devalue other activities or values that their dollars could earn.
The other activity or value that you could get off of your money is this thing called control. What is control? Control is different for each person. Control is really dialing in your specialized knowledge of what you can do with that money. A lot of times, the financial industry and financial advisors in North America will tell you this: you can either control your money or you can compound your money. But if you compound your money, you have to give up control and go hope for the long run.
They're essentially saying compound interest is the most amazing thing in the world, but in order to get compound interest, you have to give up and surrender control. On the flip side, they say if you control your money, you have to surrender compounding for the rest of your life, and you get the value of control. All I'm saying is there are strategies that you can combine and try to maximize both.
If we're going to compound our money for the rest of our life, we have to understand what we're giving up and also understand and put a value on control. Some people watching this should never lock up their money even if they could get a guaranteed 8%. The reason is they are resourceful enough that they can get a way greater rate of return than 8%—relationships, building businesses, real estate. Some people, if they had control over their money, would be bankrupt tomorrow.
It's not necessarily that control is good or bad, it's how we use control. It's like a basketball, a golf club, or a ping-pong paddle. What's the ROI of a golf club for me? It's not much because I'm not a great golfer and I end up just having a fun time. But if you're Phil Mickelson or Tiger Woods, the ROI of a golf club is millions and millions of dollars because you're an amazing golfer.
It doesn't make the golf in itself wrong or the golf club wrong; it's how you use it. The same concept goes with control. If you're someone that is clear in what you want, and you might be entrepreneurial, you might resonate as an investor, you seek control, make sure you don't eliminate or give up access to your money for the promise of compound interest. Too many entrepreneurs want to invest their money, don't want to lose it to inflation, and at the end of the day, their money is all over the place. When an opportunity comes, they might not be able to show up powerfully because their money isn't accessible.
Whereas they would be better off losing some money short-term to inflation by having that money under control earning a greater rate of return. If you're efficient, you can maximize compounding and control. There are strategies to do that. The purpose here is that compound interest is a function of math and is amazing. The majority of people should just compound their money because controlling it won't really help them. However, there is a sliver of people, probably many of you watching, that resonate with the concept of control.
We need to start quantifying the true value of control, and it's more than just a compounded rate of return. It includes other benefits like lifestyle benefits, ministry benefits, family benefits that need to be stacked into the equation. What is the true benefit of a half a million dollars in an IRA that's growing but not enhancing other parts of your life? You might be the type of person that says, "I could match the growth but could also have other benefits impact my family and what I want to do."
This blog post is not investment advice but is written hoping to help you think differently. Thank you again for reading, and I appreciate you sharing this message of intentional living.