We’re almost done covering the foundational ideas behind how I think about investing and the economy. Concepts like debt, tax, cashflow, and profit are easier to understand—and control—once you shift how you count money.
Most people think in terms of absolute dollar values: an iPhone costs $1,000 and some. Instinctively, we know that $1,000 is a lot of money for someone below the poverty line and barely a rounding error to someone who drives a Ferrari. So we say luxury goods are “out of reach.” But that kind of thinking keeps you from accessing the full power of financial tools.
The trick I’ve learned is to think in terms of percentages. The financial world runs on annualized percentages—interest rates, for example. But if you dig into finance literature, you’ll find that institutions operate on daily rates. One of the simplest examples is the money market.
In the money market, loans often last just a day. When you deposit cash into your bank, it might turn around and lend your money overnight to someone else—charging interest. That interest accrues daily and compounds. Meanwhile, you might earn only 2–3% per year on your savings. That may sound unfair, but remember: the bank takes on risk. If those loans go bad, the loss is theirs, not yours. That’s why FDIC insurance matters—ensure your bank deposits are covered.
Now here’s the key insight in my strategy: evaluate all investments using daily percentage return. And when it comes to liabilities, especially debt, service them as aggressively as possible—preferably daily. Why? Because cash continuously loses value, and interest compounds daily in the financial markets.
By making small daily payments toward your debt, you reduce principal and compound the repayment. This opens up opportunities. You can even borrow at higher interest rates—say, 20% annually—if you can beat that rate with higher returns and pay down principal daily.
Let’s walk through a concrete example.
Suppose you borrow money to make an investment that earns 1% daily. If the cost of borrowing is 0.5% daily, you pocket 0.5% profit. That doesn’t sound like much—until you remember compounding.
Over 20 trading days in a month, your $1 becomes:
\[ 1 \times 1.005^{20} \approx 1.10 \]
That’s a 10% gain in a single month—without a boss, a cubicle, or a time clock. Just smart, disciplined financial engineering.
If you borrowed $1,000 to invest at 0.5% daily gain, your return after a month of trading is $1,100. If you are able to maintain a 10% gain every month by compounding 0.5% daily, you will have:
\[ 1{,}000 \times 1.1^{12} \approx 3{,}138.43 \]
by the end of the year.
Of course, this is an ideal scenario, and real gains may not be as high. However, the principles don’t change. The goal is to compound gains daily over time, without clocking into a job—while keeping management effort as low as possible.
What’s the downside?
A naked loan—a loan without any asset backing it—is the fastest way to go bankrupt in a downturn. You could be stuck owing money that continues to accrue high interest while your investment evaporates. For this reason, managing your debt-to-equity ratio is critical.
The common advice that “debt is bad” is mostly wrong. Don’t borrow money to go on vacation—you won’t get that money back. But borrowing to grow your assets? That’s smart. Our economy runs on debt. Look no further than the U.S. government treasury. The government and major financial institutions regularly borrow from the Federal Reserve. And when they do, they’re effectively just printing more money. We all know how inflation wrecks purchasing power. The irony is that the very entities warning you about debt depend on it to function.
Every publicly traded company in the U.S. is required to file a Form 10-K, an annual financial statement that discloses how much the company owns (assets) and owes (liabilities, including debt). The debt-to-equity ratio measures this relationship:
This leads us to two essential concepts:
Solvency means that a person or business has more assets than liabilities. If everything were sold today, the proceeds would more than cover all debts. Solvency reflects long-term financial health.
Insolvency is the opposite: liabilities exceed assets. Even if you sold everything, it wouldn’t be enough to repay your debts. Insolvency often precedes bankruptcy.
When a company goes bankrupt, its debt-to-equity ratio is usually very high, signaling deep insolvency. This concept applies directly to personal finance. If you liquidated everything today, could you pay off all your debt? If the answer is no, you’re insolvent.
Reading Form 10-Ks also teaches you how to manage money like a pro. They describe in detail how the company plans to service debt—how much is due soon, how much is long-term, and what strategies they’re using to stay solvent. You’ll notice that successful corporations often carry both short-term and long-term debt. Each has a role in managing cash flow.
Understanding loan maturities helps you do the same: keep enough cash on hand for obligations while reinvesting profits wisely. The goal is not to avoid debt, but to master it.
As a personal example, my 4Runner was an expensive purchase. It took me two years to pay off $48,000. I only make debt payments on trading days—Monday through Friday—so that’s 252 days per year, or 504 days over two years.
That means I paid off approximately:
\[ \$48,000 \div 504 \approx \$95 \text{ dollars per day} \]
I love this example because it makes something abstract feel tangible. It also highlights a deeper truth: at nearly $100 per trading day for two years, it’s a serious financial commitment. Without a strong grasp of cash flow and disciplined repayment, that kind of debt can quietly eat away at your financial future. It looks like success from the outside—but may be a liability underneath.
The bright side is that no matter how much you invest, continued effort will allow you to compound the gains. It may not look like much in a year or two, but as your assets grow, your access to cash will increase rapidly.
Believe me when I say—you don’t want cash, you want access to cash.
Let’s talk about that in the next article.