What is Discounting?

Discounting is a financial term. "Discount" refers to a price reduction, and "present" means now. Discounting is the process of converting future value into present value, and the conversion ratio is called the discount rate.

For example, if next year's 100 yuan is worth 90 yuan today, then the discount rate is 10%. Note that the higher the discount rate, the greater the price reduction, and the lower the present value. Conversely, the lower the discount rate, the higher the present value. The present value of an asset is equal to the sum of all its future values discounted back to today.

For instance, when deciding whether to invest in a company or project, how should we make a decision? If someone tells you that investing 1 million yuan today will yield 2 million yuan in the future, this does not necessarily prove the investment is worthwhile. If it takes 50 years to recover the 2 million yuan, the present value of the project may be far less than 1 million yuan. If the current interest rate is 3%, depositing 1 million yuan in the bank today would yield 3.38 million yuan in interest over 50 years. Therefore, compared to earning interest from a bank deposit, the investment project returning 2 million yuan after 50 years is not worth pursuing.

The Application of Discounting Thinking

Discounting thinking is not only used in financial investments but also in many important life decisions, such as personal career development and choosing a life partner.

So-called "youth-reliant jobs" are those only suitable for young people. Young people have advantages in many aspects, such as abundant physical strength, sharp mental agility, and even outstanding looks. Careers heavily reliant on these attributes tend to be youth-reliant. The most typical example is athletes. No physical sport can withstand the decline in strength caused by aging. Other examples include flight attendants, models, and live streamers—these so-called youth-reliant jobs cannot use current earnings to predict future income. On the other hand, professions like traditional Chinese medicine practitioners, lawyers, and accountants are less likely to be youth-reliant because experience is crucial in these fields. People often trust older doctors and seasoned lawyers more, and over time, their future value becomes even greater than their present value.

Therefore, when measuring a person's value, it is not about their current income but the sum of their future earnings discounted to present value. To maximize your value, the best approach is to keep growing, continuously learning, and lowering your discount rate. Assets like knowledge and skills have the lowest discount rates, sometimes even negative.