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I celebrated my 30th birthday this past weekend. Regrettably, the party was cancelled, #ThanksCorona. But turning the leaf on a new decade brings to mind one of my favorite quotes:

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Bill Gates (??)

Bill Gates wasn’t the first person to say it–just the most famous. That quote has been re-worded and re-attributed many times in the past 50 years. But I believe that the underlying sentiment is timeless. A lot can change in ten years.

Getting personal

I know you’re probably here for financial thoughts, but I can’t get over some of the amazing changes that have occurred in my past ten years.

In 2010, I was a sophomore in college. I was worried about Thermodynamics exams. Intramural basketball felt important. I wondered whether the cute sorority girl liked me back.

After graduation I moved to Wisconsin. I worked for a year then moved back to New York. I went to grad school and got a Masters degree, and soon after started my current job. That was five years ago.

Madison, Wisconsin – make sure you get some fried cheese curds!

In 2010, I lived in a 100 square foot dorm room. I’ve moved between seven different dorms and apartments, and now I own a house.

I’ve spent half of the last ten years in committed relationships. But on this day ten years ago, I hadn’t even met the first of those girlfriends.

I now use the sport of squash as my favorite work-out, my favorite past-time, and I even give lessons for a little side income. But I didn’t pick up a squash racket until April 2010.

This is squash. I only wish I could move like this.

There’s been so much change in ten years within my little bubble. And I can hear a little voice in my head (and maybe you can hear it too) whispering, “Yup, now you’re in the steady groove of life.”

But my rational brain knows that can’t be true! The next ten years are likely to be just as transformative as the past ten.

Will I get married and have kids? What will happen to this blog? What sport am I going to discover that will take over my next decade? The future is a wild, wild place.

The Psychology of Change

The psychology behind Bill Gates’ quote is fairly well-documented. Humans overvalue short-term consequences and undervalue long-term consequences. The concept of “change in ten years” isn’t easy for us to grasp.

A single cheeseburger and fries is easy to evaluate. It will be delicious and I will enjoy it. It might make me sleepy or bloated, but that’s ok. Cheddar, please. But who wants to think about the long-term consequences of cheeseburgers, fries, pizza, soda, etc?

I look at my waistline, and I know it didn’t reach its current size overnight. Rather, it represents the cumulative average of years of decisions–some good, some bad. I’ve eaten too much pizza, but played a lot of squash. I certainly know I wasn’t thinking about my 2020 waistline when I ate at fast food in 2018. That’s just not how people tick.

If I eat one salad today, the change will be negligible. If I eat salads for the next 10 years, I’ll look like Brad Pitt (from the neck down). But how much am I thinking about 2030 me, that Jesse/Brad Pitt hybrid?

I’d argue that we’d all do better–for ourselves, and for others–if we did start thinking more about the 10-year consequences of our actions.

It’s like we’re driving from a sunny plateau into a foggy valley. Looking forward into the fog, we tend to only focus on the road we can see. But looking in the rear-view mirror, the road behind us is clear. The future is opaque, but the change in ten years past is crystal.

Our rational brains know that the future road indeed exists beyond the fog. In fact, without the fog, the views in both directions would likely be the same. The future change will be just as consequential as what we can clearly see behind us.

But it’s unnatural for us to properly weigh that future.

Financial Impacts

Personal finance is an excellent combination of short-, medium-, and long-term thinking.

It’s important to understand your next paycheck, your next grocery bill, and how much you’ve got in this month’s budget. These are short-term impacts. You’ve got mouths to feed and bills to pay. The Coronavirus pandemic brings the short-term impacts into painful focus.

Related articles about budgeting:

But proper budgeting should also take medium-term impacts into account. To me, “medium-term” means greater than a month, but less than a year.

For example, I think it’s good practice to start thinking about next Christmas. Maybe I’m just the budget Grinch, but why not put little lumps of coal money away every month between now and November? It’s better than realizing you suddenly need $200 to buy the hit new Virologist Barbie and Epidemiologist Ken dolls (the best toy of 2020).

Long-term personal finance

Just as Bill Gates and others might suggest, I think it’s the long-term personal finance ideas that people most underestimate. The easiest two to discuss are debt and investing.

Related articles about debt:

Debt, if misunderstood, is a shackle. It’s exigent. It is a gorilla that sits on your chest for decades and steals your bananas.

America asks 17-year olds to sign up for $100,000+ in student loans. They “only” charge 5-8% interest, as opposed to the steep 20% interest rate of most credit cards.

Is that 17-year old expected to understand how a 6% interest rate on a $100K loan works? While they might understand the arithmetic of paying $831 per month for the next 15 years, do they truly grasp the gravity of paying $150K+ total over those 15 years? I’d argue that many do not fully understand those consequences.

Remember–humans are bad at understanding how scenarios change in ten years. It’s easy for a 17-year old to be excited for freshman year. Intramural basketball and cute sorority girls? Sign me up!

But do you think that 17-year old will be thinking about their 30-year old self paying $800/month? I don’t! The difference between a high school senior and a 30-year old is the same as between a high school senior and a kindergartner. It’s a massive difference.

I don’t know what the right answer to the student loan crisis is. I’ve said my piece on that. But I do think that many Americans use a different standard to judge 22-year old debtors than they use to judge themselves. We’re all likely to make some long-term decisions that negatively impact us. Let’s cut each other some slack.

Good change in ten years

Of course, the compounding debt of long-term loans has a flip side. It’s compound returns, the Lebron James of personal finance. Even casual fans know about it. All the writers write about it. It’s one of the most powerful tools of all-time.

I see compounding everywhere I look. Motivational speakers talk about being “1% better every day.” Start-up companies go from the garage to Wall Street in a decade. And yes, viral outbreaks start slow, and then suddenly explode.

Credit: renewamerica.com

For the average reader, let’s look at a simple investment scenario. I looked at some complicated historical strategies two weeks ago, but today let’s consider the average S&P 500 annual return, assuming we do the smart thing and reinvest our dividends. The outcome? About 9% annual growth.

Of course, past results don’t predict future outcomes. 9% is reasonable, but far from guaranteed. Similarly, I’ll assume a 2% annual inflation rate. Reasonable, but not guaranteed.

A dollar in hand today would be worth $1.00 * (1.09^10) = $2.37 in ten years. Inflation will chip away at the “real” value of that $2.37, so it’ll only have about $1.96 in today’s purchasing power. Is a $1.00 in hand worth $1.96 in the bush?

If you’re a 401(k) investor, you might have some additional food for thought.

Your dollar today doesn’t get taxed if it’s deposited into a 401(k)–so let’s add on ~25%. And your employer is likely to offer you some matching funds–let’s say another 50%. Therefore, you start with $1.00 * 1.25 * 1.50 = $1.88.

Your time horizon might be 10, 20, or 30+ years. It’s equal to the difference between age 59 (the first eligible withdrawal age) and today. For me, that’s about 29 years.

I could have $1.00 today, or have $1.88 * (1.09^29) = $22.88 when I retire. Again, it’s important to adjust for 29 years of 2% inflation –> $13.37 in today’s purchasing power. Is $1.00 in hand worth $13.37 in the bush?

Ten years of change

Speaking of compounding, where might the Best Interest be in ten years?

In one universe, I could see this blog as a distant blip in my rearview mirror. Writing is great, but a lot of work. It could quickly drop down the priority list.

Then again, I really enjoy it. And the rapidly growing reader base (that’s you!) makes it fun and worthwhile. Last week’s post pushed my 2020 readership past my entire 2019 readership.

Now that’s some compounding interest! Perhaps the best interest? And with that lame pun, I’ll bid you adieu.

I hope you’ll give yourself a chance to properly estimate all the amazing work you can do in the next ten years. I’m excited for it. And for the present moment, I simply want to thank you for reading the Best Interest.

-Jesse