My favorite quote has to be one by Archimedes. I have written it inside my eyelids. I want to see it every time I blink or close my eyes. “Give me a place to stand and a lever long enough and I will move the world.”
If you do not love numbers, spare me this one. You see, compound interest is not like simple interest. In compound interest, the interest accrued in a given period (let’s say one year) is added up to the principal before the interest of the subsequent period(year) is calculated. And that’s what I love. Things that add up.
I love doing things that scale. I love giving up something little today to win something bigger tomorrow. Don’t you? We all want this but short-term benefits lure us away. But why?
One of the hardest things in life is the ability to balance short-term gains with long-term benefits. In almost all scenarios, when you win in the short-term, you have lost in the long term and vice versa. A dollar saved today is two dollars earned tomorrow and a dollar spent today is a dollar that you won’t have tomorrow.
Our greatest weakness as the human race lies in our inability to predict the future outcomes of our current decisions. Our overconfidence or lack of it, tempts us to ignore early signs of failure and leaves us unprepared for pleasant surprises.
The consequences of bad habits are delayed while the rewards are immediate. The costs of your good habits are in the present, the costs of your bad habits are in the future.
The reward system that is activated in the brain when you receive a reward is the same that is activated when you anticipate a reward. Desire is the engine that drives behavior, every action is taken because of the anticipation that precedes it. We are more likely to repeat a behavior where the experience is satisfying. Pleasure teaches the brain that a behavior is worth remembering and repeating. What is rewarded is repeated, what is punished is avoided. Positive emotions cultivate habits; negative emotions destroy them.
THE RULES OF COMPOUND INTEREST
In the words of Jack Butcher, the more frequently you interrupt the compound curve, the longer time- freedom will elude you. Or maybe Albert Einstein put it best, “compound interest is the eighth wonder of the world- NEVER INTERRUPT IT UNNECESSARILY.
The biggest enemy of compound interest is inconsistency. A closer rival is impatience. Inconsistency kills many dreams than failure ever did. Patience and consistency are the greatest and hardest virtues to cultivate.
In the compound interest formula, time is the major constant that will determine the amount that your principal will yield. Time is the greatest force in compound interest. And it’s only by leveraging time that we get the best outcomes in life. As Morgan Housel wrote in the Psychology of Money, “time is the most powerful force in investing. It makes little things grow big and mistakes fade away. It can’t neutralize luck and risk, but it pushes results closer to what people deserve.”
SETTING OURSELVES UP FOR SUCCESS
We overestimate what we can do in one year and underestimate what we can do in ten years. We are more concerned with our current results than our current trajectory. We are impatient with results and patient with action.
As a rule of thumb, if you want to win in this game of compound interest, you have to master the art of doing things even if you are not feeling like doing them. When doing things that do not offer immediate results, we tend to lose track and give in to things that offer instant satisfaction. You have to embrace the fact that success comes slowly then all at once.
Furthermore, the more immediate pleasure you get from an action, the more strongly you should question whether it aligns with your long-term goals. Add a little bit of immediate pleasure to the habits that pay off in the long run and a little bit of immediate pain to the ones that don’t
The more you do not feel like doing something, the more you should examine if it will affect your long-term goals.
This is the cheat code in compound interest. This is where you link an action you want to do with an action you need to do. Maybe you need to go to the gym but you want to play your favorite video game. You can promise yourself to only play the video game after you have completed your workout session. This creates a motivation ritual where you do something you enjoy immediately after a difficult habit.
TURN INSTANT GRATIFICATION TO YOUR ADVANTAGE
You need a reason to stay on track. Introducing immediate rewards will keep you excited while delayed rewards accumulate in the background.
As James Clear wrote in Atomic Habits, “we repeat bad habits because they serve us in some way and that makes them hard to abandon. The best way is to increase the speed of the punishment associated with the behavior. To be productive the cost of procrastination must be greater than the cost of action.”
A straightforward way to add an immediate cost to ant habit; create a habit contract. An example of this is where you promise to pay your roommate, friend, or partner some amount of money if you fail to do something. Like promising to pay your friend $100 every time you miss your workout sessions. This will create a motivational ritual that will keep you on your toes in the short term before you can start enjoying the long-term benefits that accumulate in the background.
IF YOU FORGET EVERYTHING, REMEMBER THIS
Remember that changes that seem small and unimportant at first will compound into remarkable results if you’re willing to stick with them for years. The most powerful outcomes are delayed.
In the words of James Clear, “when nothing seems to help, I go and look at a stonecutter hammering away at his rock, perhaps a hundred times without as much as a crack showing in it. Yet, at the hundred and first blow, it will split in two, and I know it was not that last blow that did it but all that gone before.
Thanks for reading and happy compounding returns!