An idea for you to consider
Two fathers met over lunch and were discussing their family life and finances.
One dad, let’s call him poor dad, was complaining about his financial situation. He started ranting about rising inflation and that he has little over USD 100 to invest every month. His conclusion was: “I rather spend those USD 100 while I’m still alive as I won’t get anywhere close to being rich with this little money either way.”
His friend, let’s call him rich dad, was both worried and slightly amused about his friend’s statement. While he was in the same situation from a financial point of view, he arrived at a different conclusion and has been investing USD 100 every month.
So, what did rich dad know that poor dad seemed to ignore?
The answer is: compound growth.
In finance, the concept of compound growth is known as compound interest.
Funny enough, the SEC quotes Albert Einstein in one of their Investors Alerts and Bulletins saying that “Albert Einstein reportedly described compound interest as the most powerful force in the universe”. Since Einstein did get a thing or two right in physics, I suggest we dig deeper into the concept of compound growth and see how it can benefit not only your finances, but your life in general.
In its simplest form compound growth can be defined as the earnings on your earnings.
Let’s have a look at the following example to understand why Einstein thought it is the most powerful force in the universe.
Let’s assume, we invest only once the sum of USD 100. How much money would we earn over a period of 30 years with compound growth?
|1||USD 100||5%||USD 5|
|2||USD 105||5%||USD 5.25|
|3||USD 110.25||5%||USD 5.51|
|4||USD 115.76||5%||USD 5.79|
|5||USD 121.55||5%||USD 6.08|
|20||USD 252.70||5%||USD 12.63|
|30||USD 411.62||5%||USD 20.58|
This leaves us with a total portfolio value at the end of year 30 of USD 431.19. This equals a whopping gain of USD 332.19.
What would have happened if we wouldn’t have reinvested our earnings?
Well, as you can see in the table below, we still would have gotten a gain of USD 150, but we would have left USD 182.19 on the table compared to the scenario 1 with compound growth.
|1||USD 100||5%||USD 5|
|2||USD 100||5%||USD 5|
|3||USD 100||5%||USD 5|
|4||USD 100||5%||USD 5|
|5||USD 100||5%||USD 5|
|20||USD 100||5%||USD 5|
|30||USD 100||5%||USD 5|
So, obviously this newsletter is not meant to turn into financial advice.
The question is rather: What conclusion can we draw from the rich dad / poor dad example?
The answer is: Make time your alley!
So many times we trick ourselves into believing that massive success requires massive action to quote James Clear. But actually, the opposite is true. It is more important to start small and show up on a regular basis.
You don’t trust me yet on this one? Okay, here’s another little math quiz for you:
If you can get 1 percent better each day for one year, how many times better do you end up by the time you’re done?
The astounding answer is 37 times!
So, instead of pouring your energy excessively into something for a small period of time only to feel exhausted afterwards, aim to just get a tiny bit better every single day and trust the process of compound growth.
You want to get back in shape? Well, eating a banana instead of Snickers bar is a small action, but one that will move you closer to your goal. Taking the stairs instead of the elevator? Again, a small change, but one that will help you move closer to your goal. All these small actions together compound over time and will help you get back in shape.
What’s the flip side of the concept of the power of compound growth?
Unfortunately, compound growth can as well lead to negative growth. One Snicker’s bar doesn’t hurt you. One Snicker’s bar combined with other sweets every single day, will most probably lead to health issues at some point. Not brushing your teeth once, won’t hurt. Not brushing your teeth on a regular basis, increases your chances of caries.
So, if you look at the different areas of your life:
- How is the power of compounding currently working for or against you?
- What is an area of your life that would benefit from aiming to become 1% better every single day?
(Source: Atomic Habits by James Clear / Rich dad, poor dad by Robert Kiyosaki / and many more who in one way or another touched upon this topic)
A quote for you to ponder
Your mind is the starting point of all war and strategy. A mind that is easily overwhelmed by emotion, that is rooted in the past instead of the present, that cannot see the world with clarity and urgency, will create strategies that will always miss the mark. - Robert Greene
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