Profoundly compound!

By 1st June 2018Banking

There’s an urban legend that Albert Einstein once said ‘compounding’ (interest) is the most powerful force in the universe. While the quote might have been incorrectly attributed to Einstein, it is hard to overstate the profound effect compound interest can have on countless fortunes made by those who earn it and sadly so, finances ruined by those who pay it. The overwhelming effects of ‘compounding’ are well known in financial circles, but little is ever said of its potential far-reaching effects on our everyday lives.

‘Compounding’, or compound interest, is known for the seemingly tiny, almost unnoticeable day to day effect, but yielding unbelievable results over a longer period. Its powerful effects are often demonstrated in the investment world, with a seemingly small amount almost magically turning into a fortune over time.

It all adds up

While that is old news, few people realise that the same principle can be applied to our everyday lives – or more specifically to our own skills and capabilities. Pick any subject that you are interested in, and make daily incremental progress of only 1%. While making daily progress of 1% is completely unreasonable in the investment world, this is completely doable on a personal level – especially when applied to a new skill or subject.

If you are just starting out, a higher percentage progress can be made. Conversely, if you already are very experienced or a subject matter expert, a slightly smaller target could be more realistic. This is progress measured with regards to your own knowledge or skills, and is not referring to any external measurement.

Applying the laws of compound interest, by making a 1% daily incremental progress will improve your ability not by 365% in a year, instead a whopping 3 500%+, thanks to ‘compounding’. This means that you can increase your ability more than 35-fold in the period of one year. This effect is so profound over a five-year period that I am not going to give the figures for fear of losing all credibly, except to say that it makes 3 500% look like a drop in the ocean.

One fraction at a time (all the time)

It is hard to estimate exactly what you need to do to make that 1% daily progress, but (especially when starting out) a quick 30 minutes (or even less) daily could be all that is needed. Making exactly 1% progress isn’t the point, it is simply used to demonstrate the principle – that you do not need to go from zero to hero in one day. You only need to improve an almost unnoticeable fraction each day, and do that consistently. If you consider that the average person spends around two hours a day on social media alone, there clearly are a few minutes to spare in most people’s schedules.

Earning interest on interest on interest

Free or very affordable courses are available on almost any topic you might be interested in, and presented by some of the world’s top universities like Harvard, MIT and Stanford on platforms such as Edx or Coursera. Add to that a little thing called the Internet, and there clearly is no shortage of information.

The catch? You must be consistent, and make progress on a regular basis, while constantly fighting against defaulting to your comfort zone. This isn’t easy, but if you know the rewards waiting for you, and that you only need to improve a tiny bit today, it should be completely doable. Profoundly compound!

by Hilgard van Rooyen

RMB FOUNDeRY

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