The time travel experiment:
I have always enjoyed the “Back to the Future” trilogy. As I watch this movie, I have wondered what advice would I give my younger-self if I could travel back in time? There is no doubt we would all make a few changes from our past if we had the opportunity to do so. If I could go back and visit with twelve-year-old Darron I would deliver the message of the power of compounding everything. And in case my twelve-year-old self didn’t listen, maybe I would pick up a sports almanac just to be safe (if that reference doesn’t speak to you, you really should watch the “Back to the Future” series).
What is compounding interest?
In the world of finance, compounding is perhaps the most important concept around wealth building. When Albert Einstein was asked what the greatest invention of man was he said, “compound interest.”
The idea behind compound interest is if your money is invested continuously it will compound year after year and your interest will earn you additional interest.
The longer you have for this compounding to take place the more your money can grow. Here is an example of the difference if you have 30 years of investing opposed to 20.
Stick with me here, I promise this article is not all charts and interest calculations.
| Years of Investing: | 30 | 20 |
| Starting Balance: | $10,000 | $10,000 |
| Monthly Contribution: | $100 | $100 |
| Rate of Return: | 6% | 6% |
| Ending Balance: | $160,000 | $80,000 |
Your investments will grow to 2x the amount with an additional 10 years of time. Interestingly, you only contributed $12,000 more of your own money, the rest is compound growth.
Let’s take this a step further. What if you wanted to end with the same balance of $160,000, how much would you need to contribute if you only have 20 years to do so?
| Years to Retirement: | 30 | 20 |
| Starting Balance: | $10,000 | $10,000 |
| Monthly Contribution: | $100 | $275 |
| Rate of Return: | 6% | 6% |
| Ending Balance: | $160,000 | $160,000 |
Starting 10 years later requires you to contribute almost 3x as much monthly to end with the same balance of $160,000. Imagine if you started in your mid 20’s and had 40 years to contribute the same $100 a month, your money would grow to $310,000.
Compounding increases substantially the more time you have to take advantage of it. If you wait until later in life to get started you will have to invest a much larger amount to end with half as much money. The rate of return – which we will discuss in a future post – will also have a significant impact on growth.
The interesting thing about compounding is that its principle can be applied to many areas with significant impact.
Compounding and Learning
I first realized its application to learning a few years ago when my first child was born. As I was sitting in the hospital reading about finance, the book I was reading made reference to another subject that was not connected to the book’s focus. I had recently read a book on the topic they were referencing. Because of having recently read that other subject, I immediately had a whole other book of reference to draw upon. It was as though this one line of text had now compounded into another volume of text – all within one sentence. It was then I realized that reading and learning can also compound.
Image how much you could learn if any time you came across a new topic or one you didn’t have sufficient knowledge in, if you stopped reading and went and studied about that topic before continuing. As you are reading these books will take on more meaning as your knowledge grows. You will be able to draw upon prior learning and apply it to other areas as you read. This is how compounding works with learning.
If you start at a much younger age the growth will be substantial.
I am convinced compounded learning is a major distinction between successful and unsuccessful people. Learning doesn’t guarantee success, but you seldom find someone who is successful who hasn’t compounded their learning.
Compounding and Networking
This is an area I wish I had focused on more intently in the past. I have made many great friends along the way but have focused less on networking than I should have. There is great value in having a strong group of contacts. How many times have we heard someone say: it’s all about who you know!
In relationships we must also consider the value of compounding. I am not talking about viewing all of your personal relationships and interactions selfishly by how that person can help you get further ahead. Reach out to past relationships with an honest desire to build a friendship.
I know I have had a few “friends” contact me when selling products they are involved in. Often, I hadn’t heard from them in years and suddenly they are eager to connect. This type of networking feels cheap and will likely be counter-productive.
Many of us get impatient and want the benefit from others before we have put in the work. Be constantly looking for opportunities to meet and build relationships with exciting and innovative people. These relationships will lead to other contacts as the compounding takes effect.
As with the other compounding examples, the earlier you start this building process the more powerfully it will compound. If this is not implemented, you will find that the framework is not in place when you need it. As with learning, this will not guarantee success; however, you seldom find successful people who do not have a powerful compounding network.
Compounding and Experiences
Memories are one of the most valuable asset we have. It has always been my focus with my career to have as much time as possible to spend with my family. My wife and I are deliberate in making sure we have valuable experiences with our kids. The best advice I received as a young dad was to enjoy the time you have with your kids because they grow up so quickly.
The more we experience as a family, the closer we have become. We are finding new hobbies and interest that we like to pursue. We have traditions that we now do each year because we have enjoyed them so much. These experiences have compounded into many new ones.
There is no doubt that experiences add to our enjoyment in life. The more time you have to create these memories the more compounding you will see. I see many people who are consumed with debt and the burden it creates; and in turn they don’t have the time, money, or energy to create memories.
Compounding of Time
Time is our most valuable asset – once it is gone, it is gone. How can we compound something that is not renewable? We must focus on efficiencies with our time!
Recently my wife and I were overwhelmed with how much time our yard maintenance was taking. We were spending what little time we did have picking weeds and watering plants. To solve this problem, we implemented weed control and self-watering for our yard. This is something we wanted to do years ago but were busy and didn’t get around to it. In the end we wasted more time not taking these measures sooner.
There are many areas we can be more efficient with out time. Listening to an audio book as we commute to work. Automating our businesses. Watching less TV.
Creating efficiencies in time is vitally important if the other areas of compounding are going to happen. If you desire to build your dream, there is no doubt you must be more productive. I would encourage us to look at every detail of our lives to find inefficiencies we can fix. You will be shocked with not only the areas you are flat-out wasting time, but also places you can do the same amount of work in less time.
For Entrepreneurs this concept is vital for building a business. If you are consumed by the small details of running your business, it is going to be impossible to grow. Find ways to automate processes or outsource work. You must put a dollar amount on your time so you know what it is worth. If you can outsource it for less than your time is worth, than pay someone else to do it. This will help you stay disciplined in the work you personally do.
We must be careful with our time if we want to grow. Even though we can’t compound time itself, we can compound our efforts by being efficient and not wasting it.
It is hard for people to say “no” when it comes to their time. If you haven’t put a value on what your time worth, it is unlikely others will value it for you. Be willing to say no if requests for your time are going to be a distraction.
When time is saved and used for something productive you will see your efforts compound. Find an area (perhaps TV) where you can cut 1 hour per day and direct that saved time towards a goal you have. Do this for a couple weeks and you will be surprised by your increased productivity.
Do this for a long enough period of time and the effects of your time compounding will be powerful.
Final Thoughts
Growth comes by building upon previous growth – whether it is money, learning, networking, memories, or time. We must make sure the areas we are working on are connected, productive, and have a specific purpose. Take the time to evaluate your life and where you want to improve, then apply this principle of compounding.
Get started on those areas today because time is your most valuable asset when it comes to compounding your growth.
This idea of compounding has become a topic of great curiosity for me. I am convinced if we apply this to all areas of our lives we will see the power of growth like never before. As with all compounding, there is power in getting started today.