Linear vs. Exponential Progress

by Tom Kirk

Here’s a linear thought:  “I am half way through my working years so I should have half of the money I will need to retire by now.”

In most cases you won’t. The problem with this line of reasoning is that it tries to push together the linear progress of time and the exponential growth of money. Our wealth services firm in Satellite Beach, FL knows this results in erroneous and potentially dangerous conclusions.

Our lives progress linearly, one year at a time. We are exactly seven years older from age 25 to age 32 just like from age 59 and age 66.

But if our money earns 10% per year, it doubles roughly every seven years. If we had $20,000 at age 25 and it earned 10% per year until age 32, it would become approximately $40,000. But, by the time we reach age 66 it will have doubled six times. This means it grew from $640,000 to $1,280,000 between when we were age 59 and age 66. Over the seven-year period from ages 59 to 66 our money could grow by $640,000 vs. $20,000 between ages 25 and 32. That is the difference between linear and exponential progress!

Below is a graph from page 10 of my book “Are You Worried About Your Money?” that summarizes the above example:

AYWAYM_linear graphic

Not understanding this part of how money works causes a lot of anxiety and confusion. This can cause people to do rash things like invest in speculative, high-risk activities in an attempt to catch up. Instead of letting compounding work for them, they could lose their hard earned principle and feel even more devastated than before. The problem is that most people have no idea what kind of financial resources will be necessary to create the financial future they want for themselves and their families, or how to bridge the gap that exists between what they have now and what they will need later.

Click here to download your free digital copy of my book “Are You Worried About Your Money?” to read about the steps you can take to help resolve these problems and more. Or call our wealth services firm in Satellite Beach, FL at (321) 773-7773, to schedule your complementary consultation. Don’t fall into the gap between linear and exponential progress and do something fatal with your money.

You should not assume that any discussion or information contained in this publication serves as the receipt of, or as a substitute for, personalized investment advice from FirstWave Financial. A copy of the FirstWave’s current written disclosure statement discussing our advisory services and fees is available upon request.