When I started out as a financial advisor, I met with a lot of younger people. Usually, people who had little money, but lots of potential.
One of the concepts I tried to teach was the power of compounding interest. The premise of the concept is to start saving early.
If you are unfamiliar, let me explain.
Let’s assume we are both 25 and we each earn $50,000 a year.
Since you are smart, you decide to save 10% of your salary. You do this every year for 10 years and invest it in a diversified portfolio. After 10 years and $50,000, you decided you have saved enough and STOP.
Now, since I am not as smart as you, I wait 10 years to start investing. However, I invest 10% of my salary from age 35 to age 65, or a total of $150,000.
Assuming we both earn an 8% return, who has more money at age 65?
Let’s look at the chart.
|Investment||Smart You||Dumb Me|
You have more than $162,000 more dollars than me.
How is that possible?
That is the power of compounding interest.
This principle plays over and over again in every aspect of life. It can also affect you positively or negatively.
Let’s take a look at a few areas of life where compounding can make a huge impact.
Power of Compounding
There is no doubt you are busy! News Flash: We are all busy! It’s part of life.
However, let’s say you decide family dinner is important (it is scientifically one of the most important things you can do as a family). Instead of working until 6:30. You decide to be home by 5:30 for dinner every night.
This gives you at least a half hour of quality time with your family every day of the week. You have time to catch up with your children, talk to your spouse, and bond.
Maybe it doesn’t seem like a lot, but that extra 1/2 hour together adds up. Over the course of a year, that equals 130 extra hours as a family.
How much can you learn about each other? How much bonding can you do? How much closer will you be as a family?
Over the course of 18 years, that is an extra 2,340 hours together.
An extra 1/2 hour a day may not seem like much, but those minutes compound. There are many serious conversations that will transpire over that time.
Our health is one of the first things we ignore as our lives get busier.
We make excuses as to why we can’t find time to exercise. Often those excuses include the term, “we are too busy”. The next thing you know we are 30 pounds overweight and can no longer keep up with our nine year old.
When I talk to parents, they typically explain they don’t have the time to exercise. However, when we look at their calendar we can easily find 30 minutes a day, five days a week to exercise.
Maybe 30 minutes a day doesn’t sound like a lot, but it can make all the difference in the world. When you make a commitment to exercise 30 minutes a day, you will get in better shape.
You’ll start to lose weight. You’ll start to gain more energy. You won’t be so sluggish. The compounding of exercise will start to build.
You will get stronger. You will feel better.
You may not be ready for an Olympic race, but you’ll be a lot better off than doing nothing.
If you don’t know where to start, check out this workout video I recently created.
3) Self Improvement
Just like in the finance example, the compound effect will help your personal development too.
Most people don’t think 10 or 20 minutes a day will make an impact on their life. However, I think it can make a huge impact.
If you read books for just 20 minutes a day (every single day), then you will read for 7,300 minutes year. Let’s assume one page equals one minute. That means you read 7,300 pages.
The average book is 250 pages – that is 32 books per year.
I believe if you read 32 books per year, then you will be well ahead of most people in your field. The amount of information you can learn from 32 books is insane!
That’s the power of compounding.
There is no doubt you can change your life dramatically in the areas of family, fitness, and finance. You just need to be consistent and implement the compound effect.