December 27, 2020

Compound interest has been the best teacher by far.

There are two types of people, ones who deeply understand compound interest and ones who are unsuccessful. Turn into former, today!

Compound interest has been the best teacher by far.

Whenever I read a success story or see an outstanding talent in action, how gifted they are is my first impression. They must have some innate talent that the average person does not have in order to achieve their degree of success. This is real, but not in the manner in which I describe it. The gift they have has nothing to do with the field they are in. The amount of time, effort and concentration they put into their art has much to do with it. As this work compounds, or builds on itself, their results pull away from the pack. Their success seems to come out of nowhere.

Let's talk about a study

John Hayes, Professor of Cognitive Science at Carnegie Mellon University, studied this phenomena. He needed to know how long it took the composers to produce wonderful works of art. He began with the top 500 pieces made between 1685 and 1900. He then set out the careers of each composer. He decided to measure how long each composer had worked before making a famous piece.

He found that 99 percent of the pieces were made after ten years of work. Each composer required a decade of experience to be successful. Seeing from the sidelines, these composers would come out of nowhere and be a hit overnight.

Professor K. Anders Ericsson reinforced this research. He found you needed to put in at least “10,000 hours” to become an expert in a field.

The effort appears very commonplace to the individual doing the work or to the observer. No practice session will turn someone into an expert on something. Yet, put in time, day after day, week after week, month after month, and the effects continue to build on themselves.

This is compounding.

With passport, rupiah, and wallet

Compound Interest

The principle is best known in the finance world and is called compound interest. You begin with an investment, it grows, and that sum becomes a new starting point. The next time it grows, it starts with the sum vs. the initial number.

It's time to take an exam. I'm going to give you a paisa a day doubled for a month, or I'm going to pay you Rs 500,000 right now. What will you take with you? If you had to say Rs 500,000 you'd be mistaken. Doubling the paisa for 31 days is turning into more than Rs 17,000,000.

But this is the thing. Ten days later, the balance is less than Rs 10. The method seems sluggish, almost like it doesn't yield any results. In reality, it takes twenty-six days to cross the 500,000 mark of the Rs. And then the magic begins. You've earned more than Rs 16,500,000 in the last five days!

Bear in mind that there is no investment that doubles every day. But the analogy helps to make a point. Patience and consistency over time are generating tremendous growth. This is true of finances and of life.

When I was twenty-one I had my whole life in front of me. Retirement was the last thing on my mind. Lucky for me, someone taught me this lesson and I started to invest for my future.

At the beginning, I wasn’t investing much, but I was building a habit by investing Rs 10,000 per month. I didn’t know it then, but the most important thing about compounding interest is time.

When it comes to compounding anything, time is a friend. Unless, the thing that is compounding is debt. This is scarier than any heart-dropping ride or monster I can dream of.

Watching Netflix
Photo by CardMapr / Unsplash

Become consistent

Aristotle once said “We are what we repeatedly do.” If I want to be a millionaire, one way to get there is to invest month over month for as long as I live. If I want to be healthy, I need to keep putting good food in my body and exercise every week.

Being consistent with little things leads to large things going down the lane. Consistency is the secret. But, this is where most of us collapse. We face decisions every day. Go to the gym or lie down on the couch? Practice free throws or play video games? Read your book or watch Netflix? Save or spend?

We all know the best decision to make. Yet too many, instant gratification takes hold of us and drives us down the wrong road. It happened to me more than I could count.

While this is hard, it’s also an opportunity. Most people fail this test. Choosing the right path more often than not will put those that pass in the lead. The result looks like overnight success, but it will take at least 10 years.

That's it for this blog post and if you feel that you've something to add to this or you have a different perspective then share it and discuss it on r/StoicHuman or go to the Reddit discussion post for this blog post linked down below.

Stay healthy, Stay safe!

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[Discussion Post] - Compound interest has been the best teacher by far. from r/StoicHuman