Standard debt is a liability that requires constant, monthly cash flows.

So does retirement.

With typical debt, credit agencies view us through the scope of a three digit number system; our credit score. We don’t think about retirement as debt and we don’t need to worry about a poor retirement score impacting our ability to buy a home.

In reality, retirement also needs constant, monthly cash flows.

Otherwise that “debt” grows faster than the interest from other loans. (Unless we’re talking credit cards which are a different story.)

The bottom line is: compound interest works for us and it works against us.

Small investments over time can grow to large amounts, we all have heard this story.

The same rule applies to expenses. As one early retiree put it, “What maintains one vice would bring up two children.”

Optimizing Compounding Interest

In our household, the interest on our loans runs from 3% to 6%. Our bet has been that investments will capture more value and escape the drag from these loans on our overall returns.

2016 highlights how we can benefit on such a bet. We added $15,689 in unrealized gains to our net worth.

Subtracting out $6,841 in interest left us with an extra $170 bucks every week, or $8,848 for the year.

In typical Distilled Dollar fashion, I’ll include a quote from Mr. Munger, “Einstein supposedly murmured ‘Compound interest is the eighth wonder of the world.’ Never interrupt it unnecessarily.”

This same principle applies with maximizing our value.

Once summed up by Mark Twain as, “The man who doesn’t read good books has no advantage over the man who can’t.”

While I love Twain’s version, I find it falls second to a more modern version:

-How is compounding interest working for you?

-Matt

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