Discounting - A Key Concept In Life And Money  - Making better choices between benefits now versus greater benefits later.

Compounding in financial terms:

The Time Value Of Money - A bit more technical as it takes the idea and applies it to financial situations.


In my estimated order of total positive effect:

Learning wisdom (and about life)

Learning core skills (thinking skills)

< Big gap in value here >

More formal education

Negative effect.  On the negative side, of course, compounding and/or accumulation are in effect.  The cost, in order,

Mistakes from lack of wisdom.
Opportunties not taken due to lack of wisdom.
Taking bad care of our health
Spending too much, injudiciously.

An investment of money or in knowledge "compounds" over time.  "Compounds" simply means as something accumulates additional interest on top of the original investment, and that additional interest also grows with interest (i.e. an "increase"). 

A $1 at 10% grows to $1.10 the first year, earning simple interest of $0.10 (a dime).  The second year if the interest is not spent, the $0.10 of interest accumulate will earn additional interest of $0.01 (one penny) besides the $0.10 from the original investment.  Thus, after 2 years, the person will not just have double the interest (2 x  $0.10 = $0.20) of one year, but will have $0.21 of interest accumulated. 

After 10 years the interest per year will not be $0.10 but $0.24 more than double.

If a person invests $10,000 at 10%, the following will happen:

Years        Total

  10        $25,937
  20          67,275
  30        174,494
  40        452,592
  50      1,173,909  Grew to 1,174%

That's money, but it is also true in life. 

Effect of additional education

If you learn enough to graduate from college compared to high school, you will earn $2.1 million compared to 1.2 million.  However, if the college graduate, chose to get a profession degree the total would be $4.4 million.

Comparing just the average high school and college graduates, the latter would have more social security income but would have many times the total investments than the high school graduate.  Some people say that isn't fair, just because one is greater than the other and because both are just as nice - or some non-argument with no basis.  If you just compare them regardless of race or the level of income of their parents or the part of the country they are in, assuming growth rates on investments of about 6%, the college graduate would have more than 

4 years of college = $900,000 extra income, or $225,000 per year.  Was the education worth it?

Extra savings accumulation, assuming a high school graduate saves 5% of his income and the college graduate, who has more financial flexibility, saves 10% of his income, at 6% interest, the college graduate will have at least 3 times as much in retirement assets, not due at all to "inequality" but totally due to compounding and natural non-prejudiced economics!  There is no validity in blaming some unfair cause.  (The actual difference is greater.)

The rich get richer simply because of compounding and pure economics, not because of robbery or misuse of power, but as long as "inequality" is based on anything other than us taking the responsibility for producing better economics there will only be "wrong cause" blamed but not much progress!  The underlying factors need to be fixed:  education and learning personal responsibility.

Both of those will only be done when there is sufficient realization by "the people" that it is worth the investment (paying for it in taxes) to educate people to be more productive so that they can contribute back in higher economic benefits than the costs of getting those benefits.


Just pure reality causes jobs that can be replaced by technology and machines to drop in value and pay because there will be less demand or too little demand for those with less knowledge and skills.  Those people, who are just as valuable in human terms, will not be able to produce as much value economically over time - and the only economic system that has been proven to work can only pay out proportional to the value produced.  No economy could survive if the value produced is not greater than the cost.  (Duh!) 

That's reality.  It's neither fair nor unfair.  It is just what is so. 


If one wants more benefits now, one will partially kill the golden goose that produces the golden eggs.  Let's say the golden goose has grown to $100,000 and will produce "interest" of $8,000 a year.  It will then accumulate over 30 years to $1,006,000.

If we spend $20,000 of the golden goose now, it will produce 20% less per year, of course, as we killed 20% of its production capacity.  In 30 years, the net reduction will be more than $200,000. 

If we needed the money, then that is a big problem. 

Interestingly enough people who borrow alot are aware it could be a problem, but that understanding does not extend to the government borrowing alot - who owes the money becomes blurry and the idea is that somehow it will not cause a future problem "since we can handle it" - nonsense, of course, as debt is debt and paying it down or just paying the cost will have to be done by future taxpayers: ourselves until we die but mostly our children. 

This is not by nature a political issue, it is strictly economics and economic wisdom. 

The reality always is:

Yes, investments compound

But it is always also true that problems and debt compound.

I would recommend that you minimize/avoid the latter.


Just like compounding with money, what you do in life has a compounding effect and/or accumulating impact on the future.  That means the earlier you start the greater the benefits over time.

If someone makes a spending error at age 30 of say $5,000, the cost of that will be, at 10%, $226,000 in reduced savings at age 70.  (At 6%, it would be $51,428). 

If someone makes the error of not going to college, the cost is much, much, much more, into the millions  (in the future).  (See box to the right.)


If one learns to be wise, each bit of wisdom applied affects all the subsequent years, not only in positive benefits but in avoiding mistakes and bad decisions.  The total benefit in life will be huge, huge, and huge!


The irony, compared to how people tend to value these activities, is that the time spent gaining in wisdom is relatively small compared to the benefits in each future year of life.  At age 30, there will be 50 years of benefits, but people fail to see the hugeness of that payoff.  It seems so intangible, but it is real. 

And the interesting thing is that investing in this is like creating "the gift that keeps on giving".   And what does it give?  Value.  Life value - and that is the whole reason for life.  We discuss this more in Life Productivity - Producing The Maximum Life In Your Life.  Although this is not in dollar terms, it is in terms of what we value, but in life.  We can get more of it by reading the Kindle book (free software for all computers is provided so anyone can read them) The Quickest Route To High "Life Productivity" From Wherever You Are Now.  (Link to it from Books.)

You probably get the idea at this point, although I will be adding to this to complete certain other aspects.
Be aware for now that we can also have negative compounding, where there is a negative return causing another negative return which in turn causes another negative return and on and on, unless it is stopped.  All negative downward spirals will continue until there is an intervention whether in the physical universe specifically or in any part of it, even in the mind.  See and understand The  Physics Of Life - To Be Life-Successful, You Don't Have To Be A Rocket Scientist, But You Do Have To Know Very Elementary Physics.