Exponential Thinking – How Major Wealth Happens

Your investments may grow a bit each year, but have you wondered about how some people grow major wealth? Instead of growing 10%, how can they be 10 times larger?

Many ordinary people build up millions of dollars, without having a high income or inheritance.

How does that happen?

It’s because real wealth doesn’t grow linearly.

It grows exponentially — through compounding, smart investing, and a different way of thinking about progress.

In my latest video, podcast episode, and blog post you’ll learn:

• What is exponential thinking?
• What are some real life examples?
• How does the “Rule of 72” help you?
• Why is exponential growth all around us today when it wasn’t decades ago?
• Why does investing for growth give you many times more than investing for income?
• Why is borrowing to invest so effective?
• Why should you learn to think exponentially?

Once you start thinking exponentially, you’ll see opportunities for wealth and growth everywhere.

What is exponential thinking?

Exponential thinking is a simple doubling. Instead of counting 1,2,3,4…, you double each time: 1, 2, 4, 8, 16… Counting to 10 linearly you get to 10. Counting exponentially to doubling 10 times you get to 1,024. It’s 10 times more, not 10% more.

Exponential thinking is being aware that many things in our lives grow exponentially, not linearly. It is exponential growth that gives you large numbers over time.

Humans evolved in a linear world, but it has become an exponential world. The tiger attacking you is coming at you at a linear speed. But now computer technology is expanding exponentially.

To understand the difference, linear thinking would be that you take 30 steps, which puts you about 30 yards away. With exponential thinking, your first step is one yard, second step 2 yards, third step 4 yards, etc. Every step is twice as far as the last step. After 30 of these exponential steps, you would have been 25 times around the earth!

What are some real life examples?

A simple example is a snowball rolling downhill. As it gets twice as wide, it is picking up twice as much new snow. The bigger it gets, the faster it grows. It only takes half a minute and it is getting quite large.

Exponential growth is the power behind compound interest. Albert Einstein famously said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”

A real life example is Moore’s Law. It is an observation made by Gordon Moore, co-founder of Intel, in a 1965 paper. It states that the number of transistors on a microchip roughly doubles every 2 years, leading to an exponential increase in computing power while costs remain relatively stable or decrease. This has driven advancements in electronics, making devices faster, smaller, and more affordable over time.

We have all experienced the exponential growth of computers since 1965! I remember being amazed at the first hand-held calculator. At first, only huge companies had basic computers. I was one of the first people to get a home computer and in a computer club in my 20s. With Windows, computers became very common in businesses and homes. Then the internet gave us access to tons of information and allowed us fast communication. Then 20 years ago, most of us started having hand-held devices. Now we have AI allowing exponentially fast thinking. Soon, we will have humanoid robots providing us all kinds of services.

The point is that that improving at that rate can only come from exponential thinking. Thinking of getting 10% better can never give you such explosive improvements.

How does the “Rule of 72” help you?

It is a good estimate to help you figure out exponential growth. It works for any exponential growth, such as thinking about your investments.

The “Rule of 72” states that: 72 divided by your rate of return is how many years it takes for your money to double. 

Here is how long it takes for you to double your money with different rates of return:

Return/Year (%) Years to double

1                         72.0

2                         36.0

3                         24.0

4                         18.0

5                         14.4

6                         12.0

7                         10.3

8                         9.0

9                         8.0

10                         7.2

11                         6.6

12                         6.0

13                         5.5

14                         5.1

15                         4.8

16                         4.5

17                         4.2

18                         4.0

19                         3.8

20                         3.6

Let’s compare investments with 5% vs. 10% growth with linear vs. exponential growth.

With linear thinking in 1 year, $100,000 investment grows by $5,000 at 5% or $10,000 at 10%, so you have twice the growth.

However, with compound growth over 30 years, the 5% investment doubles twice to about $400,000, while the 10% investment doubles 4 times to about $1,600,000. With compound or exponential growth, you actually have 4 times as much money after 30 years!

Why is exponential growth all around us today when it wasn’t decades ago?

We see exponential growth far more because the world is improving so much faster. There are new ideas and new inventions every day, while decades ago they took much longer.

For example, fixed income investors tend to be linear thinking. If your money doubles every 25 years, that is too long for us to think about how many times it will double during our working life. However, equity investors tend to be exponential thinkers. If your money doubles every 7 years, you can quickly see that is 3 doubles in 20 years and 4 in less than 30 years. Those are time periods your mind can easily understand.

Why does investing for growth give you many times more than investing for income?

We have witnessed portfolios for many clients growing over many years. We have seen consistently that people who invest for growth have dramatically larger portfolios when they retire, which means they have a dramatically more comfortable retirement.

For example, let’s compare growth of different investors. Growth investors usually invest in equity portfolios (stocks), which long-term have averaged 10%/year or more. Fixed income investors in bonds or GICs may get 4% today. So a balanced portfolio of half equities and half bonds should return about 7%.

If 3 investors all have $100,000 at age 30 and retire at age 60 with the 3 different investments, here is how much this grows by the time they retire. This excludes how much they invest every year, but clearly shows why the growth investors retire so much more comfortably.

Investment	Growth/Year	Years to Double	# of Doubles in 30 years	$100,000 becomes
Bonds	4%	18	1.5	$300,000
Balanced/Income	7%	10	3	$800,000
Stocks/Equities	10%	7	4	$1,600,000

Income investors tend to invest for income and usually end up with portfolios similar to balanced investments. They may make 7%/year while growth investors make 10%/year.

You may think that 10 is a bit more than 7, but note that after 30 years, the growth investor has twice as much money! The income investor only has $800,000 while the growth investor has $1.6 million.

That translates into double the retirement income from these investments. That is a dramatically better life!

And that is only the first 30 years. If you invest from age 30 through your life to age 90, that is 60 years with exponential growth.

This is why we recommend investors invest for as much growth as they can tolerate. You need to be within your risk tolerance so that you don’t panic and sell your investment after a decline. You have to stay invested to get the exponential growth. But investing as close as you can to 100% in equities gives you a much larger portfolio after 30 years – and a far more comfortable life.

Why is borrowing to invest so effective?

Many people have come to us for help figuring out how to borrow to invest effectively. It is an exceptional wealth-building tool for the right people done the right way over the long term.

Why do people that borrow to invest over many years usually end up with dramatically more money when they retire?

The power behind borrowing to invest is that the loan is linear interest while your investment is compound/exponential growth. This is because you pay your interest every month, while your investments grow & compound over the years.

For example, you borrow $100,000 for 30 years paying 5% interest. Your payment is $5,000 every year ($417/month). After 30 years, you paid $150,000.

You invest this $100,000 for growth in equities and let’s say you average 10%/year return for 30 years. You end up with a bit more than $1.6 million. Your investments grew from $100,000 to $1.6 million while you paid only $150,000 in interest.

Note that you have $1.6 million in investments while your loan is only $100,000. Borrowing to invest gave you an extra $1.5 million (before tax).

This shows you the power of exponential/compound growth of your investments vs. linear payments on your loan.

Borrowing to invest is not for everyone. You only get the growth if you stay invested through all the ups and downs. However, borrowing to invest for many years is the most powerful way to grow a large retirement portfolio to give you a comfortable life.

Why should you learn to think exponentially?

Much of our world today is growing exponentially. You need to learn to think exponentially to understand it and to see where it is going.

We see the difference comparing the finances of different people. The exponential thinkers tend to have dramatically more money.

First, often they earn much more because the careers where there is exponential growth often pay higher salaries. Then they invest for exponential growth and just have dramatically larger portfolios and dramatically more comfortable lives.

Most wealthy people grew their wealth themselves. That is true of the multi-millionaires and even the billionaires. For regular people, most wealthy people are just people over age 50 who invested for growth for a few decades.

Having a great future is not rocket science. It’s just exponential thinking, living in an exponential world, and investing for exponential growth.

Ed