This article is about the greatest force known to man: Compound Interest.
Simply put – compound interest means that returns accrue on principal as well as previous returns. This sounds like a very minor detail – but as you’ll see – it’s not.
The geometric return adds up FAST.
Take a look at this table:
In the first year, the additional return generated due to compounding is very little – just $6.58.
By the time the 10th year is up – the simple interest portfolio is now worth a measly $460, while the compound interest portfolio is worth an impressive $3471.10 – a massive 654.6% difference.
That is the power of compound interest.
A graphical representation will show exactly how exponential the difference is:
Now that we have the math out of the way – let’s focus on the application aspect of the game.
Compound Interest applies to EVERYTHING
Everything – money, relationships, health – everything.
In fact – the gains in one aspect of your life will compound into other areas of your life.
If you work on your health – it will improve your body – which will improve your personality – which will improve your relationships – improved relationships improve your social and professional network – which in turn improve your cash flows – the extra money frees up time – which can be used to network / build another business / or be spent in the gym – and the cycle goes on.
If you’re smart and actually really understood the above paragraph – you’ll see that the cycle can start at any point you pick.
You can start with building on relationships and it will compound into your health.
Small improvements in any facet of life will compound with or spill into another.
To gain maximum advantage of this process – we recommend making small improvements daily into at-least three major aspects of life – this could be money, love, networking, family, health, your children, business etc
The key here is consistency – small daily effort is much much better than sporadic large effort, because sporadic effort can’t compound on anything.
Your health won’t improve much if you do 300 squats once a month – but 10 squats a day for 30 days – you will see the strength compound on itself, even though the total number of squats is the same.
Compound interest can be real trouble too – especially negative habits that are iterated everyday. One day of eating junk food, and getting no exercise does no major harm. A month of the same will compound on itself and will cause some serious damage.
It is up to you to make sure that the interest rate is positive, because everything always compounding.
Your decisions on what you eat, how much (or little) you exercise, how much time you spend (or don’t spend) in building your businesses, and how much (or little) you network – are compounding continuously, whether you like it or not.
Whether you spiral up or spiral down – is totally up to you.
If you are stagnant, or worse – spiraling down, woe is you, because someone is out there – rapidly spiraling up – ready and prepared to kick your ass.
An interesting observation:
The greatest example of compounding is the human race itself.
From the stone age and hunting for nourishment to the bronze age to the iron age and agriculture and rearing animals for food – it has always taken lesser and lesser time to move on to bigger and better things.
200 years ago nobody knew what an electron was, and now there are electronics everywhere – you’re reading this article with the help of one.
From barter to bitcoin – compounding is the greatest force in the world.