The Power of Perpetuity
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?