Warren Buffet calls compound interest the eighth wonder of the world. It is one of the simplest ways to become wealthy. If you start investing early and often the money you make earns interest, then time does rest. Would you rather have $1 million or a penny that doubles everyday for 30 days? If you do the math, you will find that you would have over $5 million at the end of 30 days. That is the power of compounding. Compounding can do more than just provide you financial gain. It affects other areas of your life like working out and eating healthy. Things can compound negatively too which I think we have all experienced in some way, shape or form.
Compound Diet and Exercise
The book by Darren Hardy call The Compound Effect does a good job of explaining this concept. If you eat pizza for dinner, you do not get fat instantly but if you consistently eat pizza and other fattening foods then overtime you will start to notice. Things will compound negatively. Conversely if you start eating a salad every in place of a cheeseburger then things will compound positively and months or years later you will notice. Think of an ice cube melting. If you raise the temperature from 20 degrees to 21 degrees, nothing happens. Add another degree, nothing happens until you get to 32 degrees then you start to see the ice melt. You probably are doing something positive or negative in your life right now that is waiting for that tipping point. Maybe you are searching for a deal, and you are close. Maybe you are working towards a difficult goal. If you keep going and keep compounding eventually you will win. You may also have a bad habit that one day might be the breaking point to a negative experience or health condition.
Compound Interest
The rule of 72 is an easy way to see what interest rate will double your money in a certain period. 10% compound interest takes 7.2 years to double your money. Divide 72 by 10 (interest rate) to get the number of years. If you can get a higher interest rate your money doubles faster and you start compounding faster like the penny example. Double your money enough times and the 8th wonder of the world reveals itself. Compound interest is the cornerstone of a lot of personal finance books—invest at an early age consistently in a retirement account using index funds and you will be a millionaire at retirement. With how long people are living and with prices going up, millionaire might not mean what it used to. Best to keep compounding.
Compound What You Want
What would you want more of? Anything you want more of or to be better at, then take consistent daily action towards that thing. The only way you lose is if you stop. The 10,000-hour rule is a good example of this principle. The rule states that you can be a master of anything if you practice for 10,000 hours. Start compounding towards the things you want today and stay consistent.
Conclusion
Compounding and compound interest is a powerful force. It can be a force for good or a force for bad. It is up to you to decide.
