#TUTS: The Magic of Compounding.
Of incremental changes, iteration, and of cats as well.
How is the last month of the year going for you so far? What are your plans for celebrating the round-up of this year, and your achievements? Personally, I don’t have concrete plans yet, and I’m really just trying to get through the first two weeks.
Being away from the 24/7 rigors of attending lectures, ward rounds, clinics, tutorials, and night classes opened up for me a lot of unclaimed time this year. At first, I used most of the time to catch up on my TBR list, bond with my family, and laze around, but I was quickly cured of that and had to put my copious free time to use. I have been learning many things and that includes personal finance.
There is a lot to learn about this and I am pretty sure I have barely scratched the surface. However, one thing that is fascinating to me is the miracle of compounding. I know it’s not magic but I can’t help feeling that way. In finance, compounding is the increase in the value of an asset due to earnings on both the invested amounted and accumulated interest.
In simpler words, when you invest a particular amount of money, you earn an amount on that sum of money after a time period. This additional earning is then reinvested with your principal sum to yield more earning over subsequent periods. It is interest on your interest, over and over. This is accumulated over time, and the growth – measured exponentially – is where the magic is at.
For instance, a portfolio of $10000 that returns 10% annually for 25 years would grow into a whopping $108, 348 and that is without investing additional money. It’s amazing and yes, the math checks out.
The point of this newsletter: Compounding not only works in personal finance but other aspects of life. Daily acts compound into habits. Daily practice compounds into mastery. Knowledge compounds exponentially. Even relationships can be likened to investments. Building your social capital requires you to deposit a frequent amount of goodwill into people and causes. Ideas are not perfectly conceived, they get better the more you think and work on it.
The effect of compounding also depends on the frequency of additional changes. Take, for instance, the example given above. If additional money is added frequently, say $50 monthly at the same interest rate and period, the money would have grown into $167408 – that’s more than a 50% increase! Additional effort over time can be a real game-changer.
What happens if you improve your skills, net worth, relationships, health by just 1%?
Truth is, nothing happens.
Now, what happens if you improve by 1% every day for 365 days?
You’d have amassed incremental changes and become 37 times better than you were when you started. Again, trust me, I love maths and this checks out. This is similar to my newsletter article on incremental changes.
Compounding differs from linear growth in that the increases are exponential. You don’t get 1% better than what you were on Day 1, you get 1% better than you were yesterday – which is 1% better than the day before and 1.01^n times better than the day you started. I am not the only one fascinated by exponential increase, Albert Einstein was reported to have said compounding is the most powerful force in the universe.
Things add up. You don’t build a strong body in a day, or a month, or even a year. It takes years of consistent effort (side-eyeing myself).
You learn one skill. Then another. You finish one project. Then another. Over time, your accomplishments add up to form an impressive feat.
It is a game of numbers, and shortcuts don’t work – no matter how ‘smart’ you work.
For example, cyclists under the age of 26 rarely win big races like the Tour de France because it takes years to build the strength, stamina, and mindset needed to win.
In the grand scheme of things, growth is incredibly slow starting in any area you want to become better in, but performing simple daily actions and disciplines will help get you a little bit closer to your goals each day. I mean, I know I’m not going to reach my goals today, or next week or next month, but I can move closer to it each day.
PS: this is sha not financial advice. Investing involves risk, including possible loss of principal and negative returns. You should consider your personal financial situation, risk tolerance, and investment goals before investing.
These first two weeks of December is me being inundated by writing deadlines. Unfortunately for me, I sprained my right wrist on the 1st of December, so writing has been a bit harder, but we do what we have to do.
I'm currently reading The Book of Negroes by Lawrence Hill as well as And The Mountain Echoed by Khaled Hosseini. Also, still watching Gossip Girl on and off. Those are the major fun thing I’m doing right now. What are you up to? Let me live vicariously through you.
I'm also reading academic books, as I'll be having an exam soon as we resume.
I've been doing this bedtime thing this past week where I use an App lock to block my social media apps for about 10 - 12 hours depending on when I sleep. This means when I wake up, I cannot hop on social media immediately, so I use that period to go through my to-do list which I write the night before.
This has afforded me enough clarity from distractions to get my work done, and enough time to scroll aimlessly through SM during the later part of the day. Not that I do that as much as before anyway, so a win. I hope I'll be able to stick with this for a long time. This is a strategy you can adopt for yourself if social media keeps you from sticking to your routines.
Check out this wholesome thread. The cat PR😻😻>>>>>>
My anthology is still on sale and you can get it here. If you are bothered about putting your card details on the site, you can get it from me directly by replying to this directly.
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Till next time🥂,
Be well, Beloved💕