Albert Einstein called “Compounding” the world’s 8th wonder because over time an asset can grow exponentially.
For example, say you invest $ 1,000 today and generate a return of 10%.
- In one year, you will have accumulated $ 1,100.
- In year two, you will have accumulated $ 1,210
- In year three, you will have accumulated $ 1, 331
- In year ten, you will have accumulated $ 2,357
- In year twenty, you will have accumulated $ 6,115
- In year thirty, you will have accumulated $ 15, 86
If you take the amount after thirty years ($15,863), deduct the initial investment ($ 1,000), and divide the remaining $ 14, 863 by 30 years, the average annual increase is almost $ 500 (five times the initial growth of 100 $ from year 1).
If you compare the accumulated amount from year twenty-nine ($ 14, 418), your money will have increased by 1,465 USD- by more than your initial investment.
Compounding can have this magical effect in other areas as well:
For example, if you learn daily for an hour your knowledge will compound.
Or if you work out or eat well, your health and fitness will compound.
But here is the thing we often forget:
In the same way, compounding can help you build wealth, gain expertise, and cultivate a healthy lifestyle, it can also work against you:
For example, let’s say you borrow $ 20,000 at a 10% interest rate per year, repayable after 5 years.
You will have to pay back $ 29,282, almost 50% more than you loaned.
And if you fail to meet your obligations, compounding will become a real nightmare.
My point is no matter what we do, our choices and actions will compound over time.
They will either help us earn more money or fall into massive debts or get into great shape or suffer from obesity and health issues.
What makes compounding so tricky is that it takes so long to leave a lasting mark.
For example, arguing with your wife and not seeing your kids much may not really have a real negative effect on your life initially. Fast forward 10 years, and you won’t understand how you could end up in such a nasty divorce and have kids who do not want to speak to you.
When we think of compounding, it’s easy to think of habits like saving money or going to the gym. These can be great but require time and effort.
Often, we overlook thinking about simple things we can eliminate from our lives so they won’t compound against us.
I call these anti-habits- things we plan to refuse because we know they will hurt us in the long run.
Here are a few examples from my life.
- I try to eliminate nasty arguments from my life, especially with people I care about.
- I stop myself from falling into negative thinking loops that will make me feel stressed out and upset.
- I do my very best to never go into debt.
- I avoid using my car when possible so I move more.
- I switch my phone off regularly to be more present.
OK, now it’s your turn- what is ONE anti-habit you could introduce into your life immediately?
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