Most have heard it's the 8th wonder. It's essentially utilizing time effectively to grow. Though, evidently, many seem to ignore it for they forgo even starting. I'd say starting (ASAP) is truly important for it to take effect.
The most common use of the word "compounding" in everyday conversations is in reference to investing (thank you robo-advising ads from Wealth<Enter Minimalist/Innovative Lingo Here>). Obviously, to start investing one must first save.
"No shit Sherlock!"
You invest what you save; a rather simple concept in finance. You save -> you invest -> you grow. But people put it off often. Some say they'll start when they have more money. Some wait for the overnight winner. A few do start early but they also end early... foolishness. Compounding gets stronger over time. Starting early is the easy part honestly. Staying for decades is the real test.
Given various applications for compounding I'd like to look at two forms.
One quite obvious. The other? Not so much apparently.
Form 1 - Finance (i.e. Obvious - no need to read if you think you got this in the bag, skip to Form 2)
Let's assume the following:
Person 1 is the university student. Business major. Realized late he should've been an engineer given hot job market but going to try and win with finance. Saved some money from internships, teaching assistant jobs, government loans or won the ovarian lottery. Regardless, had the wherewithal to invest early.
Person 2 is the young professional. She paid off some loans. Works at a place with a ping pong table. Finally has a sum of cash so figured time to start investing some of that now on the advice of that accountant friend.
Person 3 is the newly engaged. Given the hot Canadian housing market, said "screw buying a house". Pushed off investing until a meaningful amount of capital was amassed to deploy. Some friends started earlier but figured the time to start is after having a bigger capital base.
And the result?
Wow, big difference eh? This isn't a catch-all of all scenarios. Obviously. Sure, Person 3 would have more monthly cashflow than Person 1 so could theoretically have contributed more. But if Person 3 started investing at age 30 I'm doubting his financial foresight to save hard early. The overall message is simple. Start early.
It won't seem like much at first. The difference may even seem marginal. But over time, each year becomes material. By the end, 5 years makes a huge difference for Person 1 and Person 2. I mean... look at that Usain-Boltcceleration. Over time, the difference gets even steeper... this graph only shows the difference of starting 10 years ahead.
I knew about compounding in university. I even invested back then. But, I wish I applied it seriously though. For I've realized a few years later it potentially cost me millions in a 70-90 year span. Especially since I plan to be around in 70 years.
It's as simple as starting with $10,000. Contributing $12,000 annually is about $18,000-$19,000 gross [Canadian tax rates :( ]. That's saving only $1000 per month! I know.....some can't. ....or rather, choose not to. Everyone has a choice, which requires forgoing one option for another. I personally think most who "have the option to save but aren't" are making such choices without thinking much for it. A $50,000 gross salary nets $38,000. You save, and invest $12,000 and you'd have $26,000 to spend on your life. Though if that isn't going to help you pay for that fancy car or high-end apartment rent maybe we have other problems to address first.... but that is for some other time.
So I may not know if I'll finally be able to deadlift 600lbs next year (fingers crossed). But I'm sure I'll be alive to test it, I think my survival rate for the next 20 years is pretty high... living in Canada helps.
I should also be around to celebrate my 45th birthday (not much for extreme sports too). So given that. Makes sense to invest for it.
"Ok, got it old man. Sheesh. I'll save and invest for my own well-being."
Solid. But I didn't write this to help with your finances. This is obvious stuff.
Form 2 - Habits (i.e. Not so obvious - if you skipped Form 1 and this is obvious for you too then good stuff just go subscribe to my newsletter so we can remain friends)
You know compounding for your money. Now let's apply it to your daily activities.
I asked a friend to list five activities he did in the day. He said "I can't. I work, gym and sleep. I only have three."
This is never the case. In 24 hours a human performs 10+ activities. Each activity starts with a decision.
Going to the gym is an activity. Warming up for 30 minutes at the gym is an activity. Recording your squat is an activity. Reviewing your recording during your 3 minute between-set-rest-time is an activity. Each is an activity that you chose to take on. A decision was made to spend the time to do this. I chose to be an athlete and performed all these activities.
"But old man, that's not really an activity it's kind of like a task". Fuck your technicality. Anything you decide to do is an activity. Taking a shit is an activity.
So in each day we perform many activities.... or tasks ==.
Some are second nature. Many refer to this as a habit. Training at the gym is my habit. It's second nature. Reading everyday is another habit. My day doesn't feel complete without doing them.
These are some habits now but they always weren't. I used to be fat, didn't like exercise and wasn't good at sports either. Well, I'm still not good at most sports that require coordination. You should see me try to play basketball (imagine an oompa loompa flailing).
But I wanted to improve my physical self. So at the prime age of 15/16 I elliptical-ed for 20 minutes everyday. I also did 100 pushups everyday.... a cute 5 at a time. I slowly lost weight though. I even cut my 4km run time from 25mins to 16mins. By about 18/19 I deadlifted 365lbs at a bodyweight of about 140lbs. Then at 20 I deadlifted 440lbs. At 25 (including a knee surgery) I deadlifted 525lbs. I was the first one to play organized sports in my family history so we can rule out athleticism here, just no. I built a habit. At 2hrs per training session, for 4 days a week, 52 weeks in the year, for 8 years (I started weight-training at 17/18) I've trained for about 3,328 hours at the gym.
Like money, your activities will compound. In the short-term of month to month it won't look linear. It will have constant ups and downs. Because even in investing, you'll experience 10-50% drops in a year. Tearing the meniscus in my knee felt like a 50% drop in the stock market. The 2 years of misdiagnosis was my bear market period. But over a 20 year span of consistent training, it will look like the upward slope you saw above. You stretch out anything over a decade and it starts looking smooth. You just have to keep at it.
Once something becomes habit, inventory it. It's on autopilot now. Then, start a new one. All people already have habits. Some are productive and contributing to your development, like exercise. Some are not, like smoking.
I'd say all habits start small. Training for 10 years started with 20 minutes on the elliptical. That isn't a long time commitment. Some take 20 minutes in the bathroom showering, number 2-ing, what have you. I doubt anyone thinks of 20 minutes in the bathroom as 'waste'. So 20 minutes on health ain't much sacrifice. Just reframe the investment of time. One episode of Friends while on the elliptical and I was done. I was going to watch it anyways so might as well kill two birds (or broccoli) with one stone.
Do you know what 20 minutes of daily exercise results to in 1 year? About 121hrs. In 5 years that is 600hrs of exercise. Think of all the positive effects that would have on your body. If your friend saw you at that 5 year mark and said "Man, I should've started 5 years ago.. I'll start now" they would have 600hrs to make up for. Not to mention other intangibles. If you wanted to start competing with me in powerlifting now, you'd have 3,328hrs to catch up on. Genetics, talent, great coaching may shave some off. But good luck because I won't be stopping.
Some hate exercise examples..... so let me tell you of another habit.
Journaling is one for me. I started small 2 years ago. I bought the 5 Minute Journal. Decided to do it every day. Did it on and off for half the year, then stopped. But soon after, I realized an emptiness and an apparent messiness in my mind. I don't think my mind changed. Think it was always messy. But journaling focused it and with it's absence it became obvious. You know what they say: "You don't know what you have until you no longer have it".
So I went back to journaling. But I waned to change up the writing format so I used a Moleskine, apparently that's what the cool kids all use. This continued for 6 months. Then I switched to an even bigger notebook to write more. Then another problem, it was hard to review my thoughts from the past. Now I use an Evernote. I prefer writing instead of typing but I had to embrace the millennial in me and chose portability + reviewability. So now this is a good 30 minutes of my morning and a part of my day throughout.
This habit has done wonders for me. Its made me more introspective and helped me focus my actions but I'll get into this in detail some other time.
This habit isn't about exercise. But it's still about helping yourself and most of us really like ourselves. So hope you got something out of that. If not, just listen to Charlie Munger, Vice Chairman of Berkshire Hathaway:
Charlie is well into his 90s now but still gives the same advice. With all those years on him I'm sure he has the facts to back this up.
The way I see it. Anything to better yourself is a wise decision. Build habits for things you actually care for. I don't think everyone should powerlift, only for the weird who like picking heavy things up. Pick things you want to build towards. Once something becomes habit, inventory it. It's on autopilot now. Then, start a new one. There are tons of literature out there that talk about habits taking 21 days or 66 days to form. But who the fuck cares how many days it takes. Work on something you give two shits for (that's right, Two) and just do it today. Then wake up tomorrow and do it tomorrow. Think small. One day at at time. Just keep at it day by day.
So, what are you waiting for? Begin an activity. Then keep at it. Utilize compounding. It's free. You have nothing but to gain. Join me and let's become an overnight success........in 10 years, because nobody who won the lottery did anything worth mentioning it seems.
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