The Hidden Power of Compound Impact

Monday, December 29, 2014 - 06:48

How Continuous Improvement Can Lead to Massive Long Term Results

Compound interest is the eighth wonder of the world. He who understands it, earns it... he who doesn't... pays it. ― Albert Einstein

At some point in middle school, you were likely exposed to a thought experiment to help illustrate the effects of exponential growth. The first one I recall went something like this. Suppose you started a job and were offered two options for your salary. The first option was a fixed daily payment of $100. The second option started off with a daily payment of 1 cent. It then doubled every day for 30 days. The daily payment received at day 30 would then be the fixed daily payment from that point forward. Which option would you choose?

If a person has not already been exposed to the concept of exponential growth, there is a high probability that they wouldn't take the time to evaluate option #2 thoroughly enough to avoid the obvious trap of option #1. Sure, $100/day is a 1,000 times larger payout than 1 cent/day and even doubling it several times leads to values less than a dollar. And frankly, who would think it fair to work an entire day for a single penny?

However, the doubling effect of option #2 quickly ramps up to a spectacularly large salary. By day 10 the result is a $5/day and by day 20 it's approximately $52,000/day. Finally, by the end of the 30 day period the daily salary is a massive 5.3 million a day. Not bad for starting off with a single penny 30 days earlier!

Enter My Financial Advisor

Despite being an engineer and self-proclaimed numbers guy, I waited until I was in my early 20s before I had any real savings. Even then, it was simply a lump of cash that wasn't invested in such a way that this sum would grow. No, I waited until I was almost 30 years old before I found myself sitting across the table with a financial advisor that had to remind me of this most basic fact. That's when the harsh reality set in: I had been sitting on the sidelines for almost a decade when I could have already benefited from the effects of compound interest getting me years closer to retirement.

Moving Beyond Money

The effects of compounding are in no way limited to the topic of money. The main reason I have focused on it thus far is that it's easy to illustrate how dollars and cents can grow by increasingly larger increments of value over fixed increments of time. It essentially boils down to an equation that anyone can plug in numbers and see the results.

What is less obvious is the non-numerical factors that have, when looked at individually and collectively, impacted our lives in extraordinary ways. Most of us have been exposed to this concept by way of the Butterfly Effect. The basic idea is that life is highly non-linear and that introducing changes, even in small and seemingly mundane ways, can lead to dramatically different outcomes. An obvious example is a person's choice of college. That single decision can changes where we live, the friends we lose, the friends we make, the career path we take, and so on. And each of these outcomes leads us to the next set of choice points and their outcomes, which leads to the next set of choice points and so on.

My only gripe with the Butterfly Effect (and Chaos theory in general) is that it can lead one to believe that we are subject to the whims of the world. Sometimes a specific outcome can be seen as "positive" while others be seen as "negative", but ultimately they tend to average out amidst a sea of complex interactions (or so we could believe). However, I'm of the belief that, like compound interest, focusing on continuous and systematic investments in life can result in a similar, compounding effect towards a specific goal.

A Personal Example

When I began this article, I wanted to avoid using any portion of my life as a specific example, lest you think I was having an ego trip. However, I felt compelled to provide some evidence for my claims before going any further.

A word of warning. It's difficult to create a succinct list of of choice points in anyone's life. The reason is that, like looking at a fractal, one can keep zooming into the nitty gritty details between the big choices. Such a long list would be the most thorough way to prove the point, but it would be tedious to read. Therefore, the list I've provided below only focuses on a few of the major turning points in my life. That said, I must emphasize that many of these big events would not have been possible without the much larger collection of smaller contributions leading up to them that are too numerous to list.

  • When I was approximately 10 years old, my uncle Warrn bought my family a top of the line PC. While I initially used it to play video games, it ultimately sparked my interest in computer science because I started to tinker with linux and understand how software worked.
  • When I was 14, I landed my first job picking corn at $3.50/hour (a rate below minimum wage) so that I could afford to buy new clothes for the next school year. This experience inspired me to work hard in school so I never had to do this line of work ever again.
  • When I was 17, I went into a local computer repair shop and offered to work for free in exchange for on the job training. This ultimately led to a salaried position that allowed me to make money while learning more about technology.
  • When I was in High School, I played 4 sports and ultimately caught the attention of several track and field coaches at the universities I applied to. One coach, Halston Taylor at MIT, made every effort to get me to visit. I firmly believe that this relationship with Coach Taylor was one of the factors that got me accepted.
  • My math teacher, Mr. Valachovic, wouldn't let me turn down MIT when I doubted my ability to survive 4 years at one of the toughest schools in the country. He offered to drive me there himself so I could visit for a weekend. This trip was the deciding factor in which college I went to (out of the 7 I was accepted to).
  • In my undergraduate program, I made it a point to join several research groups to gain experience as well as network. One such contact was Professor Carter, who ultimately was a major factor in getting accepted into grad school at MIT and getting connected to the team that I completed my thesis with.
  • When I was finishing up graduate school, a friend set me up on a blind date with a woman that lived 2000 miles away in Colorado. One over-the-top email led to a series of phone calls, long distance visits, and ultimately my marriage to Emily.
  • When I finished grad school, I started looking for work amidst the 2008 market crash, which made it extremely difficult to find a job in my field. Through a friend of a friend, I ultimately landed a part time gig fixing a website (something I had no formal training in). 1 years later, we launched a successful online membership site that is still running strong to this day.

The list goes on but I hope you get the picture. One success opened the door to the next and the next. And when I started this journey, I didn't believe in my wildest dreams I would be where I am today. Likewise, as I sit here typing this article, I have no true idea how much further I can take things. All I know is that I need to keep plugging away each day until the next choice point reveals itself.

Becoming More Conscious About Daily Investments

“The best time to plant a tree was 20 years ago. The second best time is now.” – Chinese Proverb

Just like finances, you don't need to win the lottery in order to achieve big results over the long haul (although a cash windfall of that size wouldn't hurt!). The point is that small, continuous contributions add up and compound on top of each other. The key is to maintain these contributions as a high priority amidst the daily responsibilities and emergencies.

One strategy that I was exposed to over a decade ago was to set aside 30 minutes at the beginning of each day to focus on your most important long term goal. While 30 minutes doesn't sound like a lot, it adds up to 182 hours a year. That's the equivalent of working almost five 40 hour work-weeks on the thing that matters most to you. If one can stick with this level of daily commitment for several years, you can't help but develop the skills and gain the experience necessary to make a huge impact on any goal you with to achieve.

Consistency is a major factor in seeing this through. It requires making the time and space each day. And trust me, it's easy to fall off the wagon when life throws you a curve ball. That's why setting reminders and milestones are helpful in staying accountable. Also, celebrating your victories, however small, helps measure progress and acknowledge that it's actually happening.

Your Personal Example

How about you? Where in your life have you already experienced the compounding effects of continuous improvements leading to a big result? And how can you recreate that process for your next big goal? The best time to start making contributions, if you haven't already done so, is now.

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About Rick Manelius

Quick Stats: Chief Product Officer of DRUD Tech. Author of Winning the Lottery Within. Graduated from MIT in '03 (BS) and '09 (PhD). Life hacker and peak performance enthusiast. This blog is my experiment in creative writing, self-expression, and sharing what I've learned along my journey. For more information, read my full bio here or contact me.