Exponential growth

I'm sure all of you know the power of compound interest. Whenever you add the interest you earn to your principal and let the interest itself earns interest, you have compound interest. The growth on your principal over time is exponential. What this means is that, if you have a steady growth of 10%, your principal will double in roughly 7.2 years. This is known as the Rule of 72. In order to calculate when your principal will double, take the number 72 and divide it by the interest earn per year.

10% interest per year - 72 / 10 = 7.2 years

7% interest per year - 72 / 7 = 10.28 years

3% interest per year - 72 / 3 = 24 years

If you attempt to calculate how long it will take to double your net worth with the current fixed/term deposit interest rate, you'll find out it takes an awful long amount of time. Most of us will consider 2-3% growth a year to be rather small and at times negligible.

But things are very different when the numbers are much bigger. Take world population as an example. Current population growth rate is around 1%. Total world population now is at 6.8 billion. 1% is equivalent to  68 million.

1% of 6.8 billion = 68 million

1% growth per year means it takes 72 years to double.

In about 3/4 of a century, there will be more than 13 billion of us on this planet

No one can explain the power of exponential growth better than Professor Albert Bartlett (retired Physics prof. at University of Colorado-Boulde). In his presentation titled "Arithmetic, Population, and Energy", he show us what are the consequences of 'steady growth' to population and energy usage.

The greatest shortcoming of the human race is our inability to understand the exponential function. - Professor Albert Bartlett

Set aside 1 hour of your time and watch his presentation on Youtube. It's just simple arithmetic and very easy to follow. It makes you wonder if steady growth is always good and grasp the true meaning of the exponential growth. I've included the first video below for your convenience.

Getting the order right

In any business, ultimately the aim is to be profitable. You need to figure out how to make money so that you can break even, expand and keep it running. At the beginning, the order of the day is to save money. Why? You need to figure out how to use less and get more. A trader will buy goods at a lower price and sell for profit to consumers. A barber will charge an amount that he will be able to pay his rent and have some left over for food.

Once you figured out how to make money, the next step is how to spend the money to grow the business. Investing in more goods and a bigger warehouse will allow the trader to increase revenue and generate more profit. The barber can hire helpers to increase the amount of haircuts per hour.

Some businesses (e.g. funded companies) seem to have the order reversed. These companies start with a bunch of cash in the bank normally from investors and venture capitalist. They will hire more people than they need and spend on things simply because they can. To make matters worse, most of them don't really know how they will generate income.

After a few years (if lucky), money will start to run out and the management panics. They will frantically attempt to save money by cutting costs, firing employees and scaling down operations. All this happens because they thought, with the money given to them, they can somehow skip the first step and ignore the whole point of doing business, which is to generate wealth not consume it.

This don't only apply in business. You need to get the order right in things you do. As they say, you can't run until you can walk. And most importantly, don't forget the bottom line.