The Paradox of Compound Interest

I have a nasty habit of asking myself “how much money would I have in 30 years if I didn’t buy this thing?” It’s much harder to justify a $10 omelette or a $500 plane ticket if that money would compound into $50 or $2500 by the time my future kids are growing up.

Founders have the same problem: (source)

 “Equity capital is expensive. Every time you do a raise, you dilute.”  I like to tell a story about the young company founder who told me he was very proud of his expensive new Herman Miller Aeron chairs in his conference room during the Internet bubble. He bought them with cash that had recently been invested  in his company by some new investors. When I explained to him how much the chairs would eventually cost if the company went public someday via dilution the expression on his face turned from a smile to a frown. Dilution maters. Do the math. People say Warren Buffett can tell you nearly exactly how much income you have forgone if you show him an expensive toy. It is a bit unnerving actually, since he does the math in his head. When someone shows a founder some expensive office space with a beautiful and expansive water view they should immediately think: dilution!

That new MacBook for your first employee would cost tens of thousands of dollars in equity dilution if you have a VC-acceptable exit. And it’s not like consumer goods generate much utility on a long time-horizon — a nice pair of earbuds will yield the same benefits whether you listen to them now or in 20 years.

But then the fundamental problem arises: how do you justify spending money on anything beyond the most bare-bones necessities?

Remember that personal growth also compounds.

Qualitatively, our relationships, memories, and perspectives are all valuable, gratifying things to have. Much more so than any financial asset, I’d argue. In the internet-enabled tech economy, our personal qualities are becoming more leveraged than ever. 

With that in mind, it becomes much more reasonable to spend on education, travel, friends, and vanity. But where do you draw the line? I suspect this contributes to why some people take on crushing debt to go to a higher-ranked college than they’d otherwise go to.

It also seems irresponsible to set your personal burn rate equal to your income. Should we spend more? Or less? Or spend extravagantly on the few things most conducive to growth or happiness then cut everything else entirely? This assumes, questionably, that we know how to distinguish between what does and doesn’t cause personal growth!

When starting a company, I agree with the conventional wisdom that you should focus on minimizing burn. The entire point of an early-stage startup is to figure out the potential growth rate of your product when it fits with the market. In personal matters, I tend to think we should instead focus on growth rate. We know with high certainty that (thoughtfully) spending on ourselves will lead to experiences and friendships that make us a better person over time. The point is that drawing a clear dichotomy between the two cases helps avoid a common pitfall: it’s easy to merge work and life then burn startup cash needlessly or fail to invest in yourself.