Compound Interest

Dearest Rachel –

I try to avoid talking about specifics regarding our financial situation in these letters, and I’ll try to continue with that today. We don’t know who might be reading over your shoulder, and as I’ve mentioned before, talking about what one makes or owns is a sure-fire way to get someone to either envy or pity you; neither reaction is good, whether for the person reacting or individual prompting the reaction – particularly if the reaction leads to action of its own. There’s a story I once heard about a pastor who wore a (to the narrator) particularly stunning sweater, leading the narrator to inquire as to “which commandment am I breaking to covet [it]?”

“Well,” the pastor smiled gently, eyes twinkling, “that depends. What method were you planning to obtain it from me?”

Now, this wise old fellow (wise guy?) saw it as an opportunity to be light-hearted about the situation; perhaps he knew his parishioner well enough to know that no harm would come to him for wearing such a desirable article of clothing. Out here in cyberspace, that isn’t the case; there are those who would wish ill of those who do better than they do, and others who might put that covetousness into action, leading to a whole series of potential broken commandments. Although, for those who would put such desires into action, one assumes that little concern is paid to such offenses; those consumed by present wants rarely give much thoughts to the rules laid down by society or the One who gave us the impulse toward an orderly society.

Nevertheless, with that in mind, one is forced to speak in generalities about the topic, despite the fact that it’s an absolute necessity for life, and there are lessons learned all the time about the topic that would be well to pass on. Indeed, they would be better directed at those reading over your shoulder than to you. Presumably – while we on this side of eternity have no idea of what things are really like – you have everything there that you need in heaven; it’s those of us still trying to hold ourselves together that need to concern ourselves with a certain measure of material wealth in order to sustain ourselves from day to day.

I bring all this up because of the one part of yesterday that was out of the ordinary; a visit with our broker. As a rule, these thrice-yearly checkups are just that; a look through the portfolio to see what needs to be tweaked, if anything. Are there investments that are underperforming and should be jettisoned? Are there positions that could stand to be increased due to stronger returns? What about the future of the financial world; should I be reallocating assets to brace for certain possible changes? It was fairly routine stuff for us back in the day – a situation that hasn’t changed since your departure, since fundamentals are fundamentals – and more often than not, the experience is similar to a regular physical at one’s doctor’s; there aren’t often big changes that need to be made. Mostly, it’s a “things are doing well, keep doing what you’re doing” reassurance.

But there was a warning I was given regarding the fact that it continues to grow apace, and tinted by the fact that you had to leave not all that long ago; at some point in time, these investments are getting to the point that inheritance taxes will be applied to them when I follow in your footsteps, and pass them on to Daniel.

Now at the moment, they’re only likely to be subject to the state threshold – Illinois has a fairly low bar compared to that of the federal government. There’s apparently some talk of raising the bar to match that of the feds, but I wouldn’t rely on that any further than I could pick our current governor up and throw him. Usually, once a government of any size gets its hands on something to tax, it’s not going to give it up unless coerced by voters either turning back on the policy or the state itself. Still, the fact that it’s even being rumored about rather than being dismissed out of hand carries some weight.

But even if the bar were to be raised, my broker pointed out that I wouldn’t be out of the woods just yet. He pointed out that, if I were to make the same rate of return as I’ve been doing for the past couple of years – heck, even if it was consistently a couple percentage points less than what I’ve been making– thanks to the miracle of compound interest, the sum total of my holdings could triple in a mere fifteen years. Of course, that would require that I not keep dipping into the pool for various expenditures, like my regular travels (one of which just came up the other day, and I’ll fill you in on another letter shortly) or remodeling efforts or the like. But still, the fact remains that, if left untouched, money properly invested tends to grow – and one can forget just how fast it can grow until it’s actually pointed out.

By way of example, you’ll remember how we had a specific goal in mind to save up, so that we might – in our minds – have enough to live off of with sufficient comfort as for you to give me the green light to quit my job, and effectively retire. By the following year, I’d pointed out that it had grown to where the principal was such that even Daniel would be able to retire. Sure, the market was booming at the time, and inflation hadn’t yet kicked in like it would over the next few years – it had been a perfect positive storm, in terms of investing and returns – but this was that whole principle of earning and reinvestment, and where it could take one.

This is a lesson that, in retrospect, I wish I had taken more time to teach the kids when I was in Honduras; the value of saving, and how interest piled onto interest makes money grow. Granted, an amortization table would have probably made their eyes glaze over, but if there was a way to get them to apply it to their own money, it might have piqued their interest more. The problem is, their circumstances probably make it hard to keep money saved; what little they have has to be applied to one urgent expense or another as they come up. If you can’t hold onto principal, it can’t grow (which, mind you, isn’t their fault – needs have to be attended to. It’s when needs are under control, and you can focus on – or deny – wants, that you can better set aside some spending for a rainy day. As it is, every day down there is rainy at some point, literally and figuratively).

Of course, the matter of “where money could take one” only applies to this side of the veil. In the example I mentioned from late in 2020, barely a month after I told you about our financial situation, suddenly such concerns were forever behind you. You didn’t get the chance to really enjoy what had been saved up for you. In a way, you wound up following a generations-long tradition in your family of not being able to spend what had been saved up, but for a different reason; they were just too penurious to lavish much on themselves, whereas you just ran out of time to do so.

It is something of a dilemma; interest takes time to compound, but we don’t always have that kind of time to let it build up. We often need the money for something, or we want to use it while we can still enjoy it; either way, it’s a matter of wanting it now rather than being willing (or able) to wait until later when there’s more of it. Then again, if I want to reduce the risk of dealing with inheritance taxes, I suppose I should get on with spending a bit more of it – or turning more over to Daniel in life, rather than waiting to simply will it to him – so it’s not so much of an issue, eh?

Anyway, I’ve got to get on with the day, and a few other things that I can fill you in on next time I get the chance to sit down and tell you about them. For now, honey, just keep an eye on us, and wish us luck. We’re going to need it.