Ever since moving out of the city, I have taken up gardening. My garden isn’t massive, but that suits me just fine as I’m a novelist and won’t be able to handle acres of land anyway.
When I first bought this house almost ten years ago, my father planted a tiny bay tree in the flower bed. It was no more than 50 cm in height and was looking all vulnerable. As it was planted by my father, it bore enormous sentimental value for me so I actually stipulated in the tenancy agreement that the tree must be well looked after. My tenants did look at me weirdly every time the tree was mentioned but nonetheless ensured it was watered and fertilized regularly.
Fast forward 2 years, nothing really happened to the tree. I didn’t think it grew more than 10 cm.
Fast forward 5 years, again nothing happened. It was at the 70 cm mark at most.
We moved in at the end of Year 6 and for the next 12 months, that tree must have hit puberty because it shot up like a rocket, growing to 80 cm in a space of a year, more than all the growth over the last 5 years combined.
What had happened to my tree was a classic case of exponential growth, where the rate of growth becomes ever increasing.
An example of exponential growth
What causes exponential growth is a process called frontloading. A fancy way of saying preparation.
What is frontloading?
Front loading is when time and effort is spent disproportionally at the start of the process rather than distributed evenly throughout.
With my tree, the reason why I didn’t observe any significant surface growth (i.e. visible changes that I could see with my naked eyes) was because all the energy was spent on growing the root of the tree, which went from 30 cm to over 60 cm into the ground.
To non-biologists, the root of a plant burrows deep into the soil and is used to absorb water and nutrients, the 2 essential elements to fuels growth. This means the longer and more numerous the roots, the greater the surface area for absorption and the more fuel it has for growth.
How is frontloading connected to wealth?
One definition of wealth is simply a collection of asset minus liability (i.e. your net worth). The key to building wealth is therefore to maximize your asset value (and minimize liability).
The classical way of defining an asset is the sum of all its future cash flow discounted to present.
SO when you are buying a rental property, you are effectively paying for all of its future gross rent to be received upfront at their present value. This is an example of frontloading because you are paying upfront for all the future cash flow potential of the asset.
Here’s the funny thing: the future is infinite whereas the future cash flow years must be finite as otherwise, the asset price will tend to infinity as well.
This means if you put in significant time upfront to accumulate asset (e.g. save £1,000 per month for 10 months), then once you have channeled it into an asset with a defined rate of return (i.e. a savings account at 3.6% interest rate per year), assuming the rate can be maintained indefinitely, then in theory you could generate £360 of income every year without any incremental effort.
Why is frontloading an efficient way to accumulate wealth?
When I prepare a meal, I use one of the two methods:
- The Blitzkrieg Method: When the meal time strikes, I dash to the fridge, see what’s in there and try to cook something.
- The Marathon Method: After breakfast (or lunch), I do a quick planning of what I want to eat in the next meal, take out the ingredients, do some quick preparation so that when the next meal block strikes, all I have to do is just to cook.
I don’t know about you but I find the Marathon Method to be more stress-free and the meal quality higher. That is a classic frontloading operation where the majority of meal preparation takes place way ahead of the actual cooking period.
I think it boils down to the fact that Blitzkrieg makes me reactive (driven by my hunger) whereas Marathon is proactive and allows me to decide what I want without external pressure. It’s driven by my intrinsic desire for tastier and healthier food.
The same can be applied to wealth accumulation:
- Frontloading of effort and time spent increases the chance of creating an income-generating asset which allows the income to be saved and reinvested (think about a dividend paying stock and DRIP)
- Front loading puts you in an active mode to anticipate your finance rather than reactive to changes in your financial situation.
Salary is the opposite of frontloading and hence not a good way of wealth accumulation
The interesting thing is that for most people, a salaried job, which is what most of us are conditioned and accustomed to, is simply the opposite of frontloading.
A salaried employee exchanges his skills and time (mostly time) for a fixed income. This by definition means that one must expend a fixed amount of effort consistently in order to generate an income. This means the employee himself is the asset (for the employer) rather than being in the process of accumulating assets for himself.
A chance observation of how a tree grew enlightened me on the concept of frontloading, which is the foundation for wealth creation because it enables productive use of resources in a planned manner.
Has mother nature taught you anything cool lately? I’d love to hear your stories. Please comment away.