The Human Brain’s quirkiness

Affirmative action, compounding, Financial Independence, Human Brain

Dr. Peter Diamandis and Steven Kotler recently released their new book The Future is Faster Than you Think. Being a voracious reader I have been devouring this book as well. We will keep the details of the book out of this post.

This book is part of a trilogy. Their earlier books Abundance and BOLD were amazing and really make you think that we are living in a world which is much better and safer than what our forefathers ever got. If you have not read these books, I would highly recommend you reading them first before you read this one, because it will give you a context to this book. I read their books also when I am feeling low. These books show you that the world is moving in the right direction and human beings have an ability to bounce back and always pivot to a higher level in life.

What I wanted to share from this new book, The Future is Faster Than you Think, was content of two paras which the authors used and which has stuck to me.

They talk about the medial prefrontal cortex which is the part of the brain which gets activated when we think of ourselves. As per them it gets deactivated when we think of others. Surprisingly whenever we think of our future selves it gets deactivated. And the further you project into the future, the more it switches off. Which is why people are not able to save for their retirement because for your brain (medial prefrontal cortex) the person who will benefit from the tough choices you make today is different from you. Now you see the quirkiness even within our own brain. What is supposed to actually get functional when you have to think about yourself, switches off, when you project yourself into the future

The other issue is that our brain does not have the capability to think in exponential and global terms. Due to this anything which is depicted by an exponential equation is difficult for the brain to comprehend.

Which brings me to my fascination with compounding. Compounding in its very nature is exponential in nature. And therefore even though I keep talking about compounding in almost every post, I still find most people read what I write but don’t take action.

Coupled with what I have written earlier about habits, I think that is one of the key reasons why more people are not financially free. They sell time for money and because their brains don’t comprehend compounding they don’t let money work for them.

I once read money is a good “servant” and a bad “master”. So if you can make money work for you by using the laws of compounding, you can aspire for a Future which is much bigger and better than your past.

Till next time then

Carpe Diem!!!

Simple versus Easy

Affirmative action, compounding, Human Brain, Sales

Why am I getting into semantics. Most people use them interchangeably.

Simple however is not Easy at all.

I lead a team of sales and marketing people. And whenever we have a review and the people who are behind on target come back with various excuses for not being able to do things. Sales incidentally is a very Simple job.

You need to meet enough people to solve their problems, for which they are willing to pay. Simple statement.

However this is where things become difficult and are not EASY at all. How do you find enough people to meet who have a problem you can solve. Then starts the next item whether the person wants you to solve the problem for them. How do you ensure you are meeting enough people on a regular basis.

Most human beings believe that they will do some extraordinary effort and the problem will get solved before the deadline. Which does not happen. Magic rarely happens in nature.

In terms of the sales guys there are only 3 ways that a business can grow as Jay Abraham mentions – you sell to more people, or you sell more often to the same people or you sell a higher value to the same people. Now however if you combine the 3 ways, you can actually do wonders because of the geometry which comes into place. Again Simple but not easy. Because you need to take steps everyday, day in and day out to ensure you are doing these simple things. Which for the human being is not easy. That’s where most sales people fail.

Let’s take another example of simple versus easy.

Einstein came out with the simple equation – E=mc^2. Very simple equation where energy is equal to the product of the mass with the squared value of speed of light. However while most people – including me – can write this equation like above, we can’t understand its usage in real life. This equation however helped Einstein explain and build his whole theory of relativity. If you watched the serial Startek Enterprise on television in the 1980s, Captain Kirk and his team use to transport themselves from their ship to somewhere else using the same equation conceptually – by first converting mass into energy and then at the destination – back from energy into mass.

Another example of a very simple equation which is not easy to comprehend and for which I keep ranting in this blog.

The compounding equation – Sum=Principle Amount*(1+(rate of interest/100))^No of periods (years/days/months) – S=P*(1+R/100)^N

I myself did not realise the implications of this equation till 2013, while I had learnt it in grade 7, almost 40 years before. If you can learn to ensure that you are on the positive side of this law you will become rich even if you just keep investing small amounts at regular intervals for a long long duration of time. However if you think that someday you will be able to invest money and you will suddenly become rich, it’s a fallacy of the human mind.

On the other hand this same equation is used against you by the finance companies who give loans or credit cards. I shared in my last post some graphs of how credit card debt is one of the major causes individual bankruptcies and why people are never able to get out of education debt. I had been in this situation till about 2013 but took forceful steps to come out of it.

A lot of things in life are based on simple principles like I have shown above. However they become easy to follow only with practice/rigour/discipline. You have to keep doing the grind every day. The sales guys have to meet enough people everyday to identify if they have problems which we can solve. You have to work out everyday to ensure that your muscles don’t slack. You have to set up automatic systems which take out money from your bank account and invest them.

Left to your mind, it will always play games and make you feel that you will somehow suddenly be able to accomplish magic.

Keep at it. Carpe Diem!!!

Investment strategies for young women Part -3

compounding, Financial Independence, Youngsters

In the first part I wrote about some fundamentals of interest rates and the rule of 72 and how using the rule of 72 you will know how soon you can let compounding grow your wealth. You can read part 1 here.

In the second part I spoke about the importance of taking insurance – life and health – before looking at making any kind of investments – because the earlier you take the insurance, the lower it will cost. If you are interested you can view the post here.

Today I will talk about the next thing you should look at before going in for your investment strategy. As you start your job, first ensure that you have your 3 months of expenses set aside. The job market is extremely volatile and you don’t know what is in store the next day. So you should always have money available in your savings bank which can help you meet your 3 months expenses.

You may think of 3 months expenses, equals 3 months salary because you end up spending all your salary every month. That’s not the case.

What you are looking at is the basic things you will need to survive for 3 months if you don’t have a job or don’t get salary for 3 months.

So this would include the rent for the house that you stay in. It would include the electricity bill and basic food requirements. Any loans that have to be paid back monthly and basic travel expenses. It will not include entertainment and eating out budgets. It will also not include holidays and tourism.

Typically the amount needed to survive at a basic level of sustenance for a human being is generally not much. If you will chart out your basic expenses you will realise that in most cases it’s not more than 30% of your monthly salary.

When I was young, I had taken life insurance as my first step. However I would end up spending all my money tht I would earn. Since I was living with my parents, I never felt the need to save. It was only after I had got married and I started staying independently and the company I was working for went in a downturn and we didn’t get salary for months. We did not having enough savings and we ended up buying things on the credit card. But because salaries were getting delayed the credit card debt started pilingup.

Which brings me to the next part. Never ever take credit card debt. I know in some countries, its necessary to improve your credit rating. You however need to understand before you start spending on the credit card, what’s the level of interest they charge on outstanding. Then use the rule of 72 which I explained in the first post. In India typical credit cards charge more than 3% per month, which means that your outstanding doubles in every 2 years.

So say you bought an item worth Rs/$100. After the first 30 days of credit you pay back the minimum 5% of the outstanding due – which is $5. This means $95 of the principle is now outstanding. Next month on this outstanding the company will charge 2.5 % which would mean your total outstanding (principle+interest) would become 97.38. At minimum 5% payment due next month you will end up with an outstanding of 92.3.

I have given above a chart of how your payment will scope out if you just keep paying 5% of the outstanding back. You will take more than 10 years to payback Rs/$100. Similarly if you were to pay 10% of the outstanding amount, back every month at the same level of interest, you would take about 5 years. But if you pay back 25% of the outstanding amount every month then you will payback in about 2 years. And all this is assuming that you have not made an additional expense on the card. Then the the whole chart will change dramatically

Now look at the amount you would have paid back to the credit card company in absolute money over the period of the time you were paying the interest and principle.

So when you take a credit of Rs/$100 and pay minimum 5% of the outstanding every month then you payback more than Rs/$3500 and when you are paying back 25% of the total outstanding every month then you will end paying a total of Rs/$ 431.

What the above is showing you is how compounding is working “against” you and “for” the credit card company. This is the reason people fall into a debt trap and are able to come out of it with great difficulty while all the banks and credit card companies are always growing.

So as a general rule take a credit card because you have to start getting a credit rating built but ensure you are always paying back everything in the interest free period. That way you can actually take advantages of the credit card. I will cover those in a separate post.

For now after you get a job, take an insurance for your life and medical/health. After that ensure you have a bank savings account which has minimum 3 months of coverage of basic necessities covered. Then go for a credit card to build your credit rating, but ensure you are paying back within the interest free period.

Till next time.

Carpe Diem!!!

Laws of compounding to beat the corona virus spread


I have always spoken about the magic of compounding. Knowing the interest rate and the tenure can help you generate wealth.

However today all over the world you are seeing the negative impact of compounding. The corona virus is following the same compounding logic. You can use the same rule of 72 to determine how soon something will double. Wherever the the rate of growth has been allowed to cross a threshold it suddenly starts doubling every few days.

Countries like the US and Italy and overall Europe where there was a delay in putting lockdowns in place, the rates have galloped to almost 30%/day. By the rule of 72 it means that every 2 odd days the number of cases is doubling.

What has to be understood is that medical infrastructure, facilities. and staff, cannot keep growing at the same rate at which the virus is spreading. So the rate at which deaths will take place going forward is going to be even higher. The medical infrastructure needs respite if it has to be able to take care of people. In developed countries, the population is dispersed and the medical facilities are very good. For developing nations like India where the population density is so high and medical infrastructure is still not so good, it’s a time bomb.

Since there is no cure yet for this, the only way to handle is by ensuring reduction in contact between people.

Now that’s the good news.

Since it can only spread through contact, you can dramatically cut the rate of growth by not coming in contact with another human being. And since the compounding equation is exponential in nature you can take benefit of reducing the spread dramatically.

If the rate of growth is brought down from about 30%/day to 1%/day then it will take 72 days for the number of people infected to double. If you bring it down to 0.1%/day, it will take 720 days for the infected people to double. That will then ensure you are able to take care of the people infected better.

The PM of India along with the government of has been taking pro-active measures to ensure that we keep the growth rate low and has also put a 21 day lock down to essentially cut the growth rate. But somehow there are still people who are not realising the gravity.

I have been locked in my house for the last 8 days except to bring essential items like milk and bread but I still see some people walking in the open and talking to others in the open without masks and essential safety measures. I can understand about the poor, uneducated people who don’t understand the gravity, but I see even well educated people doing the same things.

Not sure if you have read the book “Triggers” by Marshall Goldsmith. If you haven’t, highly recommend you read it. In chapter 2 of the book – he talks about belief triggers that stop behavorial change – and one of them which come to my mind because of which people are not willing to change – item 5 – ” I shouldn’t need help and structure” . Most people overestimate themselves and don’t like simplicity and structure.

The virus spread can be brought to a grinding halt with such a simple solution of just staying locked up….but we have a problem adhering to this simple solution.

I just hope you and your families are safe and continue to stay locked to bring the growth rate down dramatically.

Till next time….