Back to the Basics – What is Compounding Interest?
Compound interest is “the interest on interest,” or the interest earned on your initial investment, accumulated year after year. The sooner your start, the better off you’ll be in the future.
The onus to utilize and implement compounding interest is put on individuals even more with the decline of employer pension plans and the rise of defined contribution plans such as 401ks. You must be proactive and disciplined with your savings and investing. It is not rocket science but it is a behavior in which a habit must be formed.
Applying The Concept of Compounding Interest
This topic has been discussed ad nauseam but I think compounding interest in relation to the non-financial areas in your life is less discussed, at least among financial professionals. The concept of compounding interest can be applied to other areas such as hobbies, relationships, skills, and business. For example, exercise takes changes in lifestyle, diet, fitness, and consistency to make progress over a period of months and years.
Growing a business and acquiring new customers can be a grueling task. Over time, enough calls and meetings are conducted with each one building upon one another. This eventually leads to critical mass in the sense that you begin getting customers or sales on a consistent basis. In turn, there are more opportunities available either by getting introduced to more profitable markets or bigger clients.
The point being, your actions build on each other. The most difficult part is almost always the beginning in the first few years. In order to gain enough positive momentum in which you can see major change and results, it will take time. This includes health, business, and family to name a few big ones.
If you change your mindset and take a long-term view of your daily activities in these areas, your actions and outlook can change. It is not easy by any means but I think recognizing this will provide some peace of mind and positivity. “Don’t lose sight of the forest for the trees” – something I think we’re all guilty of, especially when dealing with complex problems or goals that are so far out in the future, such as saving for retirement.
In The Almanack of Naval Ravikant, Ravikant, a famous angel investor and entrepreneur, comments that 99% of effort is wasted. Read the few paragraphs starting on page 48 in the link above. It provides a good perspective and outlook in my opinion.
It can be extremely frustrating when you’re not seeing quick results from anything you work hard at. This can be applied to building wealth and investing since it usually takes multiple decades to create a legacy and to achieve financial independence.