The Power of Perpetuity
Photo by Neil Brooks
My son’s three favorite numbers are infinity, googleplex, and several. Lately, my favorite concept for considering numbers is perpetuity. The power of compound interest is a popular personal finance topic, but what may be even harder to get our finite minds around is the power of perpetuity. Its impact is significant both from the savings and income sides of a budget, yet we often write off opportunities for perpetuity when a sum sounds insubstantial in the present.
Let’s start by considering the savings side, because that’s a little easier to grapple with mentally. Take a relatively small expense like a cable bill. Let’s say you’re paying $60 per month. Sixty dollars is not a huge amount of money. It might not make a drastic difference in your finances. But when you think about the power of $60 per month in perpetuity, it looks a little different. That’s $720 per year. That’s $720 you can’t put toward debt, build into your emergency fund, invest for long-term goals, or share with people in need. That’s $720 more you need to bring in every year for the rest of your cable-watching life. That’s $720 per year that’s not earning interest. Sixty dollars per month is almost half a million dollars over 50 years at 8% growth ($479,932.83 to be exact).
I realize this example is a bit extreme in the time-frame. But at age 30, I’m facing an average of 50 more years on the planet. We need to start thinking more in perpetuity or we’ll miss out on its power. We think about what we want now and how it’ll affect today, this month, maybe this year if we’re relatively long-sighted. While we need to enjoy and appreciate living in the present, we also need to consider the real trade-offs we’re making with our money (and time). Would I rather watch cable TV, or leave my children or a charity half a million dollars? This is extreme and over-simplified for the sake of illustration, but I hope it brings home the point. (And just because I don’t happen to watch cable doesn’t mean there aren’t 100 other ways I could blow half a million dollars over the long haul.)
Now let’s think about the income side. Take, for example, investing in rental properties. The upfront cost of purchasing and fixing up a property may seem overwhelming. You might not start seeing a return on your investment for 5-10 years. But after that, you could bring in an extra $1k per month in perpetuity. Sure, you might have the property vacant for a few months here and there, and you’d have work and expenses to maintain the property, but an average of $1000 per month in perpetuity is nothing to dismiss, especially if you invest it in retirement or college funds.
Now let’s say you find a few ways to save money—on utilities, food, transportation, or whatever—and you’re saving $500 per month and (to be conservative) bringing in an extra $500 in perpetuity. That’s an extra $1000 per month to work with—in perpetuity. This is the power of frugality: if you live on less, you simultaneously can invest more and require less income in perpetuity. So while your investments grow, you freeze or even deflate your lifestyle, meaning you’ll need less of that stash when the time comes to start living off it.
Maybe you have no interest in cutting cable or owning a rental property. These are just examples. But if you can find something in your budget you’re willing to consider spending less on, and extrapolate the impact that could have over several decades, you may find yourself motivated to make a change you wouldn’t otherwise.
The same goes for the income side. Maybe you’re under-earning because you’re afraid to make a career change. You figure you’re making enough and feel safe where you are. I’m not at all in favor of revolving life around making as much money as possible. But you could be missing out on a more rewarding and lucrative career simply because it’s more convenient in the moment to stay put.
The power of perpetuity is why we’re willing to call our utility companies and negotiate lower rates. It’s why we shop at a discount grocery store and mostly cook at home. It’s why we buy second-hand (or even trash-pick) many items. It’s part of the reason Neil changed industries in his career, to increase his marketability and earning potential. In isolation, none of these moves might change the course of our financial lives; taken together in perpetuity, it’s the difference between financial slavery and flexibility.
Again, my point is not to work away your life and spend every spare moment scouring your budget for ways to save a dime. Rather, as you’re faced with day-to-day financial decisions, try to consider the power of perpetuity as well as the needs or whims of the present. It’s the latte effect on steroids. And it lets you dream bigger than you ever will just living for today.
How could you harness the power of perpetuity in your finances?
I started doing this with thinking in terms of saving money. At one point I wanted to hire a person to do all my Pinterest images, which I think was maybe 50-70 per month. Not too bad, right? But over the year, that was one vacation, or something I REALLY wanted, or retirement savings. It’s not that it’s inherently bad to have spending in that area, but there was no real ROI so it didn’t make sense. Better to keep that money for something else, and do Pinterest images myself!
Great example, Tonya. If we can think the bigger picture, we can make more informed choices about when to spend and when not to.
Very good point on the power of perpetuity. Small amount of money does add up over time and I think leaving a legacy to your kids and future generations is a great idea. That’s one of the things we wish to achieve as part of our request to FI.
It’s shocking how much a small amount can add up! That’s a great goal to incorporate into your FI journey.
Under-earning can go two different ways. For most, it’s not stepping outside the comfort zone & taking the risk for the better, high-paying job. I’m guilty as charged with this one, “What If I Fail?”
The other side of under-earning can be clinging to a job because it pays so much money. Yes, money is great & necessary but you can never have enough of it & eventually personal sacrifices have to be made to keep making x,xxx dollars each month. What good is money (& being a slave to a job) if you cannot enjoy it with your family or helping others?
I agree–the golden handcuffs are dangerous. There is no point being miserable if you can make a living and be happier with those 40+ hours of the week (and have time for other things as well).
I try to remind myself about this when my brain wants to pay off the mortgage faster rather than max out a SEP (which is my goal for the year). One makes a lot more difference in the long-run.
I think our emotions want to pay off the mortgage faster, but we’ve tried to be wise about other long-term goals as well. At least you’re choosing between two good options.
The examples in this post are really motivating. We just paid off another credit card last night and we’re seeing the power of perpetuity in not having to continue paying as much interest. Every time we pay off more debt, that results in less monthly interest, which allows us to pay off more the following month on other cards. I just can’t wait until we can use this power to increase our funds instead of just paying off other people.
Side note: My little girl refers to everything as happening next year or last year. As in, “I can’t wait to have macaroni and cheese next year.” LOL
Big congrats on your debt payoff progress! Seeing you money go where you want it to can be so motivating to continue.
Kids say some funny stuff! Their time references are always zany for a while.
This is such a great post and a great topic that people need to be more mindful of. I think it’s a great argument for sacrificing in your 20s and 30s as well. I feel like I’ve sacrificed a lot of “free” time the past four years working on my blog, doing side hustles, trying to move up and make more at work, etc. I think all that focus on increasing income early on will pay off long-term because I can apply those earnings towards debt, investments, etc. that will have a greater impact long-term.
I’m trying to think this way about our current home. It’s a fixer-upper and we are taking our time with improving it, but long-term we’d like to keep it and rent it out. We may not see much of a return for 20+ years, but once the mortgage is gone and (hopefully) the house upgrades last, we should make some money off of it forever. That’s the goal at least!
That’s a great point. The earlier you put this power to use, the more powerful it becomes over time. I agree that making good career moves early on can make a huge difference in your lifetime earnings.
Great examples of the power of small changes over time. I know there are a few things I’ve been putting off like cutting the cord. It’s easy to get stuck in our habits and just go with the flow. With our upcoming move, I’m looking make all these changes at once as we start a new life in a completely new setting.
Waiting to make some changes along with your upcoming move makes a lot of sense. It’ll spare some hassle both before and after. I’ll be you won’t even miss cable with a new country to explore. How exciting!
There really is a power in perpetuity. Whether it’s saving or paying off debt, there is perpetuity in almost all financial decisions/actions I do in life.
In all financial decisions my wife and I do, we always ask ourselves if we can make or live without the products we want to buy. For example, we like to eat at Olive Garden. I told my wife that we couldn’t do that because of the cost. So, we decided to buy our pasta maker and make pasta from scratch every time. This saves us a ton of money and will save us a ton of money in the long run.
My wife and I decided to buy a used, reliable, CPO car than a new one. We have had the car for years and have not experienced any problem yet (knock on the wood). We decided to cut our cable a long time ago and subscribe to Netflix and Hulu. That was the best decision we’ve ever made. The savings stack up and will make a difference now and in the future.
Great examples. I agree that cooking at home and driving an older car provide substantial savings over the long wrong, and in my opinion it’s not much of a sacrifice.
I totally agree! This is a great reminder that seemingly small changes can yield large savings/earnings over time.
It’s surprising how much it can add up!
I’m really struck by the logic that frugality = lower cost of living = less required for a state of financial freedom = earlier financial freedom. I used to imagine a luxurious lifestyle when I heard the term “financial freedom” – but now it’s the opposite. And it’s very, very attainable. I love the fact that we are shifting our reality – even though we started so much later than we should have.
Yep, it took us a while to put this whole financial flexibility picture together instead of just postponing lifestyle inflation till after debt. It’s great you started when you did–better “late” than never.
I like the title of your site and I also try to live like I’m poor by and living on half my $71,000 take home pay in Los Angeles. I list the ways I save on my site:
– Max out 401k–$18,000 + $2130 employer match
– Max out IRA–$5500
– Save extra paycheck money after maxing out retirement accounts–$5480
– Save December yearly bonus–$7030 after taxes
– Save tax refund–$2670 (I have 0 allowances withheld on W-4 to get a larger refund. Another way to pay myself first)
– Live close to work and drive to/from work only, I walk or bike to do errands
– Ooma home phone service and Tracfone pay as you go cell for emergencies
– Mohu TV antenna so no cable bill
– Cut my own hair
– Bring lunch to work
– Dine out only on birthday and some holidays
– Exercise at home using Pilates reformer, yoga mat, meditation pillow
– Basic home wifi since I’m at work all day and can use it there free
Great practical points; I’m sure those really add up!
Sorry for nitpicking but I think you meant $60 a month, not $80. $720 per year is $60 a month. Or if you did mean $80 per month then it’s $960 a year and $570,098.03 after 50 years compounding at 8%. Either way, love the example!
Ah! How did I miss that? Thanks for the heads up.
I love this way of thinking about it! We figured out sometime last year that any dollar we can cut from our monthly budget is $300 we don’t have to save for retirement, per the 4% (25x) rule ($1 x 12 months x 25 = $300) — that’s sort of our version of thinking in perpetuity, by putting spending in terms of what something really means, besides just that one-time purchase.
That’s a great equation for putting every dollar in perspective in perpetuity. Thanks for sharing that!