Let's talk about compounding!
Welcome back to week 4 of Call to Action!
Let’s get straight to the topic today. Compounding. This concept is a simple one, yet fascinating. You would be amazed at how compounding is not just a mathematical concept, but is a law of nature. The more you think of it, the more it makes sense.
But, first of all, what is compounding?
Most of us are familiar with the concept of compound interest in banking. In simple terms, when you put your money in a savings account, you receive interest for the capital you deposited for the first time. Then, the interest gets accumulated with the capital and for the second time, you obtain interest for the accumulated capital. For the third time, similarly, the previous interest amount gets accumulated, and the new interest is calculated for the latest accumulated capital.
You get the idea, right?
It’s not a straightforward case of addition, but of rather insignificant accumulation over a constant period of time. The key word here is time.
Here’s the interesting fact. Compounding is not just for banking. It is everywhere - in investment, technology, scientific inventions, improving your skills, physical fitness, changing your lifestyle or in specialising in your area of employment.
Let’s look at a story of how compounding works. The following is a (paraphrased) story related by Morgan Housel in his book, The Psychology of Money.
In the 1950s, computers were a relatively new thing. Computers needed a device to store data. IBM was the tech company that first created the hard drive to store data in a computer. This was created in 1956 and could hold up to 3.5 megabytes of data. Huge achievement at that time? Absolutely. But to put this into perspective, you cannot store a PDF document of around 10 pages in this hard drive. You most certainly cannot store any of your good quality photos in your phone.
In 1960s, the hard drive received an upgrade. A few dozen megabytes were added. With this hard drive, perhaps, you could save around 10 - 15 photos from your phone. Gradually improving, in the early 1990s, hard drives with a capacity of around 500 megabytes were made. So within a matter of 40 years, the hard drives improved in capacity by a hundred times!
Hang on, the capacity exploded only after that.
In 1999 - Apple introduced 6 gigabytes hard drive (6000 megabytes)
In 2003 - Hard drive with a capacity of 12 gigabytes.
In 2006 - 250 gigabytes
In 2011 - first 4 terabytes (4,000,000 megabytes)
In 2017 - 60 terabytes
In 2019 - 100 terabytes! (400,000,000 megabytes)
Think about it. In less than 64 years, we have travelled from 3.5 megabytes to 400 million megabytes. If we break the journey down into 2 segments, from 1950s to 1990s, the growth was slow, but consistent. From 1990s to 2019, we have witnessed explosive growth.
Housel has an interesting perspective on this:
“If you were a technology optimist in the 1950s, you may have predicted that practical storage would become 1000 times larger. Maybe 10,000 times larger, if you were swinging for the fences. Few would have said - 30 million times larger within my lifetime. But that’s what happened.
The counter-intuitive nature of compounding leads even the smartest of us to overlook its power...”
This is the beauty of compounding. The cumulative effect of it over time is often beyond our comprehension.
You’d recall that the key word of compounding is time. How does it work?
Compounding teaches us there is no shortcut. It asks of us to start somewhere, have slight improvements and maintain the consistency. To feed into the system regularly and witness the massive growth over time.
I’ll share with you the secret to get started with compounding. This idea is from James Clear, the author of Atomic Habits. He asks us to focus on 1% growth each day. Pick something from your to do list - to change a habit, learn a new language, write a book, improve public speaking, or grow physically fit. Start with the first step of what it takes, and keep doing it 1% better. Keep at it despite anything that comes against it - fear, embarrassment, failure, anything.
This is what happens over time:
Observe this diagram. It shows that if you keep up with 1% improvement everyday, you become 37 times better in one year alone. On the contrary, if you persist on negativity, for instance, on junk food or stress, they too have a negative compound effect in your life neutralising any positivity you may radiate in other areas of life.
Besides, the best thing about compounding your skills or habits is that, the 1% improvement has a rub off effect on any of your day to day activities. Remember, it’s not a journey towards a particular goal - you don’t get to stop anywhere. Instead, the plan is to simply get better than before and keep doing it. We will not know when we get to see the massive growth. We may not even realise it if we do not pause and reflect. But the journey is definitely worthwhile.
To all my subscribers, thank you. I appreciate your time and interest. You keep me accountable for all that I write.
If you liked this post, share it with your network. I would love to hear your thoughts on this - you can give me your feedback by replying to this mail. I can also recommend you some interesting material if you like to know more about compounding. Signing off until we meet next week!