Compounding Effect

Einstein was a brilliant man. Among his profound thoughts, ideas, and quotes is this gem:


The older I get the more I find Mr. Einstein was right on the money (pun intended). Today, I won’t be diving into a finance lecture. However I do want to talk about compounding and how impactful it can truly be!

Compounding (Investopedia): The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings. In other words, compounding refers to generating earnings from previous earnings.

Compounding (Endeavorpedia): The ability of an individual to generate positive outcomes, then those outcomes generate momentum and even better outcomes. In other words, compounding refers to generating success from previous success.

What am I talking about here? Does Yoda write this blog? :).

I’m talking about habits and discipline. I’m writing this in January, when most people are beginning to find out resolutions are hard to keep. You may be struggling with keeping that new work out routine alive! Maybe you decided to quit smoking or eat healthier. Maybe you resolved to have no resolutions! I’m not a big fan or “resolutions” but I do support annual goal setting. Even more specifically, goals that require specific measurable behaviors. And I REALLY like when those behaviors can be incorporated into a routine and become successful habits.

Imagine for a second: how much wisdom you could gain if you read one non-fiction book per week for an entire year? Now, imagine if you read one non-fiction book per week for 25 years! Do you think you would have more or less wisdom than someone who read one fiction book every quarter for 25 years? I would hope so! This is an interesting consideration for two reasons:

1) Quality. I’m not just talking about books here, I’m talking about quality and purpose. There are quality fiction books and poor quality non-fiction, and vice-versa. There are high-return activities (education, practice, fitness, etc.) and low return activities (mowing the lawn, TV, Video Games, etc.). Both are important, but if you fill your time with nothing but low-return activities, you are unlikely to achieve your true potential. More importantly, the compounding effect for high-return activities can’t be measured but it can be seen over the course of a lifetime. If you build quality, high-return activities into your routine, you’ll reap the rewards throughout your lifetime.

2)Purpose: It’s important to understand why you are doing the things you do. I happen to enjoy playing video games (XBOX). However, I know that the time I budget for video games is low-return and strictly for relaxation. I also know that I need to limit this low-return activity to only 1-2 hours per week so I can focus on more important and higher-return activities (family, fitness, etc.). Too often, we are driven by our impulses rather than our priorities.I’d love to play XBOX 12 hours a week but I also strive to be a good husband, father, and have a successful career. I know that I’m incapable of achieving the things that really matter unless I purposefully choose to engage in high-return activities on a consistent basis. The more we think about WHY we do things, the easier it is to budget our time effectively. Have fun, play XBOX, read fiction, watch TV, etc., but DO NOT let your impulses control you. You must be the master of your time.

Compounding interest can catapult your finances or it can sink them. It all depends on whether or not compounding is working for or against you. The activities you choose to engage is will either catapult you toward your goals or pull you further away from them. Compounding is truly the 8th wonder of the world! :).


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