What is Discounting?

Discounting is a financial term. "Dis" means reduction, and "counting" refers to the present. Discounting means converting future value into present value, and this conversion ratio is called the discount rate.

For example, if 100 dollars next year is worth 90 dollars today, then the discount rate is 10%. Note that the higher the discount rate, the greater the reduction, and the lower the present value; conversely, the lower the discount rate, the higher the present value. The present value of an asset equals 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 the decision? If someone tells you that investing 1 million yuan today will yield 2 million in the future, this doesn’t necessarily prove the investment is worthwhile. If it takes 50 years to recover the 2 million, after discounting, 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. Thus, compared to earning interest from the bank, an investment that returns 2 million after 50 years is not worth pursuing.

Application of Discounting Thinking

Discounting thinking isn’t just used in financial investments; it’s also a valuable mindset for 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 areas, such as abundant physical energy, 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 stamina caused by aging. Other examples include glamorous flight attendants, models, and live-streaming hosts—these so-called youth-reliant careers cannot use current earnings to predict future income. On the other hand, professions like traditional Chinese medicine doctors, 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, we shouldn’t just look at their current income but rather the sum of their future earnings discounted to present value. To maximize your value, the best approach is to keep growing, keep learning, and continuously lower your discount rate. Assets like knowledge and skills have the lowest discount rates—sometimes even negative ones.