📈8th wonder of the world!
💡Compound or go home | Wisdom Letter #159
Hey friend 👋
Today I want to talk about the mental model of compounding, and how it applies to every aspect of your life - health, wealth and relationships.
Compounding is a mathematical principle that comes from the idea of compound interest.
Interest accruing interest!
But.
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Now, onto today’s topic -
Compounding
First, compound interest - Interest accruing interest.
Let’s say you put $10 in your bank account, and get earn $1 interest on it. Now you put that dollar back in to your account to increase your principal to $11.
Now this $11 will earn you $1.1 interest.
And this cycle will keep going as long as you keep reinvesting the interest.
With time, your tiny principle will snowball into a large sum.
There are two important concepts to care about here –
Reinvestment – Basically not interrupting the compounding process. Adding on to the initial corpus to see it grow.
Time – Giving the process time. All good things in life take time. The growth is slow initially, but as the interest adds up it can get exponential over time.
If you are persistent and patient, compounding can do wonders for you.
But this is not just about money.
Compounding as a mental model works in all areas of life – be it health, relationships or knowledge.
Compounding Examples
Finance
Finance has the most obvious application of compounding but there are a few nuances we must cover.
You invest in stocks, bonds, mutual funds.
You do it regularly, over a long period of time. You don’t touch your investments, not take them out unnecessarily.
Then you are bound to see compounding gains.
One caveat…
This works with fixed income instruments like bonds and not so much with dynamic instruments like stocks.
Relationships
Compounding works in In romantic as well as business relationships.
The “principal” and “interest” in this context are the regular acts of kindness the two partners indulge in.
There is of course friction in every relationship.
But if two people can manage to keep their relationship net positive everyday, and add on to it just a little, then over years compounding can wildly benefit both of them.
In business – the longer you have been working with someone, the easier it is to trust them.
Naval Ravikant on business relationships -
“If I’m doing a deal with someone I’ve worked with for 20 years and there is mutual trust, we don’t have to read the legal contracts. Maybe we don’t even need to create legal contracts; maybe we can do it with a handshake. That kind of trust makes it very easy to do business.”
More from Naval on Compounding Relationships.
In romantic relationships, as two people grow old together, they understand each other better.
They get used to each other, they trust each other a lot more than they can trust anyone else.
And with such thriving, compounding relationship it becomes easier to deal with the toughest challenges in life – be it raising children, changing careers, or dealing with the loss of loved ones.
Of course, the opposite of it is an unhealthy relationship with lack of trust and filled with insecurity.
The longer you stay in such a relationship, the worse your life will get. That’s negative compounding!
Fitness
The impact of compounding is quite obvious in your physical health.
You just have to do 10 pushups a day for 30 days in a row to see the impact.
Every subsequent pushup becomes easier with time, and you can feel the change in your body during that time.
Doing 10 pushups a day for the first time in your life can seem daunting, but after a few days, you can start to do more than 10 pushups without any difficulty.
That’s because our body adjusts to the new stress, it builds muscle to deal with it, it builds strength, and gets conditioned.
With time, it becomes easier and you can choose to do more.
You can choose to reinvest the interest back into the principal.
If you can maintain a streak long enough, and increase the intensity even just a little, you will see tremendous results in your body.
Final Word
Whenever you see someone get exponential gains or losses, you can trace their journey back and see the effect of compounding in their life.
The two most important aspects of compounding that we must keep in mind – reinvestment and time.
If we are patient and persistent, we can watch compounding run wild.
Continue Reading…
For a comprehensive discussion on Compounding, including how it applies to knowledge and wisdom, and how negative compounding works, do read the complete article on our website -
Further Reading -
Read a more investment and data-driven angle on compounding here.
For a more general and actionable understanding of compounding go here.
Here’s a cool video of understanding compounding with rice on a chess board, watch it here.
Quote to think about -
“Compound interest is the 8th wonder of the world, he who understands it earns it, he who doesn’t, pays it”
- Albert Einstein (allegedly)
Question to ask yourself -
“What behaviors can I do every day to compound my growth? From the lens of health, wealth and relationships? How can I get 1% better every day at them?”
Think about it!
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