Compounding Works Everywhere, Not Just in Finance

The jury is still out on whether or not Einstein really called it the greatest force in the universe or some such, but compounding is one of the most amazing things in existence.

The fact that given little inputs over a long period, one can harvest several orders of magnitude more in results than the effort put in is a force that finance has made incredible use of. By investing little sums, consistently, at a good rate over time, compound interest yields a massively higher return for one. Seriously, if you put away $600 monthly, earning a good rate and not deviating from the plan no matter the circumstances, one could end up with several millions over a number of decades. It’s incredible.

I realize that this law also applies to several realms other than just finance. Knowledge compounds. I stumbled on to a bond pricing scenario which went over my head entirely the first time I encountered it years ago. Giving all I’ve learned since, I saw it again today and I could see crystal clear what all the issues were. No one explained it to me all over, my knowledge base has just grown and I’ve synthesized that information through all the new connections and lenses I’ve developed. I encounter the same feeling when I try to explain many of my investment thoughts or processes to beginners or on here. I find out that it’s not easy to isolate a lot of my thought processes because they’ve cohered into a kind of broad situational awareness that lets me make decisions somewhat intuitively. Over time, this is what separates professionals from the rest. There’s just no other way to get there except to constantly read, invest in your knowledge and allow yourself to grow. Over time, it compounds and you start to think about things in a way that is more than the sum of what you’ve learned. And once you get there, you’ve gotten it. Even in your sleep, you’ll be able to make snap judgments and decisions because the knowledge is all in there in your head. It works for acquiring knowledge, or a skill, or learning a new language.

The negative side of compounding is also just as powerful. If you’re carrying credit card debt or student loan debt, and you’re not aggressively paying it down, it compounds just as rapidly to the point that you’re shoveling higher and higher amounts towards interest payments alone. Or if you wait too long into your career to start saving for retirement, you’ll have a much harder time of it. The difference between starting at 25 versus 35 to save for retirement is an almost 30% lesser target fund at retirement. It’s substantial.

Knowing things like this helps you put life in proper perspective. Slog through the hard work today, plant the right seeds today, keep busting your behind learning that language or skill today, hustle and invest that sweat equity today but always make sure you’re keeping your eye on the right vision and setting things up properly now because in the future, your harvest will be worth it. As the Good Book says in Hosea, “He who sows the wind, shall reap the whirlwind.” Thats compounding.

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