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Compound…what?

Much is written about the miracle of compounding. Often Einstein is quoted as saying the most powerful force in the universe is compound interest, but there’s much more to compounding than espoused. Compounding is simply any condition where effects (good or bad) can be multiplied over time. Interest rates and investment returns are the most common examples, but I will discuss a few other applications which I believe are even more powerful.

When you set a goal to exercise each day, your cardiovascular or musculoskeletal systems strengthen incrementally. At first it’s not noticeable, but it starts to add up over time. Unfortunately, there are biological limits to this compounding function.

One other way to use compounding for self growth is with knowledge. Again, we’re a little limited by how fast we can read or the quality of information which we consume, but imagine improving just 1% each day, or week. Over a lifetime, it will be easy to master any topic or skill. Malcolm Gladwell, a famous writer, notes that it takes over 10,000 hours of practice to master a skill. Considering the compound effect, we realize that each successive hour is more powerful than the previous.

A more powerful case of compounding is human history. Each new person born and each new technology discovered increased the overall rate of development for the next discovery. Most of human history seemed quite slow, then suddenly the Industrial Revolution seemed to accelerate the world. The human experience today is measured by “iterations”, which can be as fast as minutes for software technology companies.

Even the atomic bomb is a case of compounding. Each nuclear reaction releases more energy than the previous, triggering the next reaction, repeating over and over until boom… I think maybe Einstein was referring to this compound effect, too.

Don’t forget to save and invest in your finances and yourself, and you will beat everyone’s expectations.

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