“Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” — Albert Einstein.
If we take up credit card debt, our financial situation can be in terrible shape a few years later. Then, compound interest is working against us.
If we invest wisely, compound interest will make us richer over time.
Warren Buffet bought Berkshire Hathaway stock for $7.50 a share decades ago. Currently, it trades above $400 000 a share. Compound interest is the principle that made this possible.
Compound interest doesn’t only affect finances. Our habits, relationships, and health are also affected by this principle.
Our habits compound even though it goes largely unnoticed in everyday life.
“Habits are the compound interest of self-improvement” — James Clear
Many people try to become 1 percent better every day. It might not sound like much, but if you get one percent better every day for a year, you will end up almost 40 times better! Of course, it doesn’t necessarily add up mathematically like this in real life, but you get the point.
Momentum
Small changes stack up over time! We are good at noticing sudden changes, but tiny improvements will pass us by. It can be hard to continue engaging in good habits when we don’t see immediate results. That is why understanding compound interest is so crucial; otherwise, you might get discouraged when making your life better.
Personally, I decided to be serious about my life a few years ago. Up until then, I had done very little and had basically only gone the path of least resistance.
I decided to start studying electrical engineering after many different entry-level jobs. Next, I decided to become more conscious of my digital habits. When I had more time on my hands, I picked up reading books. Eventually, I had built a business while taking my degree by continually adding new, tiny improvements in my life.
When we start doing positive things, we will get into momentum eventually. Then, everything will get easier, and we have the chance to take on more responsibility.
Think about the end result
An excellent way to realize the importance of compound interest is to ask yourself how something will affect you if it is kept up for a year. Drinking a bottle of coke will not affect you much. Having that drink every day for a year will be bad for your health.
Every time we make a decision, we also make it easier to make that same decision again in the future. That is because our brains are plastic, and our actions affect our neural wiring.
Every time we do challenging things, we are reinforcing great neural pathways. Every time we succumb to temptation or are lazy, we reinforce neural pathways that will turn us into a shell of our potential long-term.
Therefore, when you take your future into account, you need to realize that behaviors that will make you 1 percent better or worse today will actually make your life many times better or many times worse in the future.
You vote with your actions every day
You vote with your actions every day how your future will turn out. Every time you eat an apple instead of potato chips or read a book instead of watching TV, the sky is the limit. The reason is that good habits repeated over time can give you a future that is much better than you could ever have imagined.
If you keep chipping away at your goals, you can end up doing much better than what you think is possible right now. This is because you can only picture things from your current worldview. Many things work exponentially for better or worse.
Building better habits in one area of your life will make it easier for you to do the same in other areas of life. Your peer group, finances, health, knowledge, and other areas of your life are affected by compound interest.
Start as early as possible. If you postpone taking action towards your goals, you are basically taking up a loan with a huge interest consisting of the opportunity cost of what you could have been doing.
Every time you engage in a habit, you are in the process of becoming your future self. Every action leads to a future that you decide.The accumulated difference between good and bad habits a few years down the line is enormous.
It all starts with the small decisions we make when nobody else is watching.
Make compound interest work in your favor, not against you.
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