Compounding for life

The first google search result for “compound interest” is from wikipedia: Compound interest is the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest.

Another from the first page: The compound interest is the difference between the cash contributed to an investment and the actual future value of the investment.

These definitions don't do a particularly good job of articulating what this principle actually means and how powerful it is. One way to visualize it is to type a dash (or other character) with your keyboard into a text editor application. Copy that dash and paste it, resulting in 2 dashes. Copy the 2 dashes and paste them, now you will have 4. Copy and paste those 4 and you have 8. Keep going until you can quickly fill up the entire page with dashes in 1 or 2 copy/pastes. What you notice here is that early on, the going is slow. You are doing a lot of copy/pasting. As you progress it gets a little faster, then much faster, then all of a sudden you are filling up entire rows and an entire page with pixels. This exercise reflects a doubling of your "capital" each time you copy/paste and thus is not a realistic growth rate for a typical investment, but it is a simple way to visualize the power of compounding.

This principle is most often applied to the world of finance, and certainly its impact cannot be overstated. If I am grateful for any advice I've received over the years, it would be to "start saving early," something my grandmother hammered into me from an early age. This commonly recited wisdom comes in multiple forms but the main point is that the sooner in life you start saving (i.e. investing), the more quickly the "sets of dashes you are copying and pasting" will lengthen as you age. In the context of retirement, this means that the sum you are left with at the moment you choose to retire will be much larger the earlier in life you create and prioritize the habit.

Compounding be applied to other areas in life as well. I often think about how the decisions we make dictate the path on which we find ourselves. If at an early age, for example, you decide not to spend an adequate amount of time studying and playing the "game" of school, several outcomes are likely to happen. The primary metric for measuring success against those around you - grades - are likely to be poor, therefore your future options will be limited. You will naturally be surrounded by people with similarly limited options. You might understandably adopt a victim mentality, thinking that the ever-shrinking list of opportunities presented to you are simply a product of bad luck rather than the outcome of thousands of previous decisions. On the other hand, perhaps you decide at some point to play the game to the best of your ability: you put in the time required to be prepared, you surround yourself with peers who are thoughtful about their future, you follow instructions and demonstrate that you are dependable. Over time you find that things break your way more often than not and when they don't you are surrounded by people who lead you to realize that adversity leads to growth. As the Roman philosopher Seneca is quoted, "luck is what happens when preparation meets opportunity."

I find that business is another area where the compounding effects of decision-making have an outsized effect. In starting a new business or project, you might select a vendor early on and find yourself reticent to change due to sunk costs or the headache that often comes with switching. Staying with this vendor may lead you to utilize some technology or process that may not be ideal. Years later you may be forced into a more painful and complicated project as a result of this (technical or otherwise) "debt." Separately, if you are someone who does not do well at the game of workplace politics, you may have an inclination to shy away from opportunities for self promotion or building your "personal brand." In general, occasional avoidance is not likely to be fatal, but steadfast refusal to engage can lead to the perception that you don't care about your job or the organization (even if untrue). Skipping happy hours, not speaking up during management meetings, not promoting the good work that you or your department is doing is understandable for introverts and those who prefer to let their work speak for itself. The reality is that much of life is a competition which you cannot win if you do not play the game.

All of this is to say that our positions in life are a result of thousands and thousands of decisions (and to a large extent the situation in which we started). Some are insignificant (what to have for lunch). Some will have a years-long ripple effect (whether or not to relocate for a new job, or whether to help that "friend" out with a favor that seems shady). Poor decisions made along the way can compound such that it becomes vastly more difficult to change trajectories. Good - and often difficult - decisions made early and often will lead to more opportunities down the road. Its true that it is never too late to start investing and it is true that it is never too late to start making different and better decisions, however the sooner you do so, the sooner you will reap the rewards. Keep the end goal in mind use it as a filter for decision making along the way. Most importantly, embrace the journey.