As an investor, compounding is my favorite term. The power of compounding is one of the most phenomenal things we encounter in life. The brilliant scientist Albert Einstein even called compounding the “eighth wonder of the world.” Seen everywhere, it has a staggering impact on our finances, energy, and even our emotions. In this article we focus on the powerful affect compounding has on our time, and illustrate how every minute not spent wisely can cost us more than we realize.
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What is Compounding?
Most people associate compounding with a simple savings account, but in actuality many things in life compound. These things can compound positively, or they can compound negatively. Financially, compounding can create wealth (when investments compound) and it can cause a spiral into poverty (as interest on debt—especially credit card debt—compounds).
To define compounding, we can say that “compounding is the ever increasing growth of an asset caused by prior growth rolling over.” To use banking and credit card terms, it is when interest gained grows because it gains interest, and it keeps growing because it continues to gain interest that also grows.
That might be brain-twister to read but the concept of compounding is simple, yet powerful. Even so, few people seem to realize the incredible benefits and destructive results of compounding, so it is largely ignored. The microwave generation doesn’t see much in the slow start so they never make it to the magnificent finish.
Perhaps the simplest way to understand compounding is that compounding is a chain reaction. That fits perfectly around the point I want to make shortly about time.
Dominos vs the Empire State Building
There is an adage involving dominos and the Empire State Building that we like to use when encouraging people to invest early in life and be patient. Rather than reading it, here is a a 60 second video that illustrates the concept wonderfully.
What starts out small grows magnificently large thanks to the power of compounding.
A compounding investment
Take another illustration from the investment world.
Let’s make a hypothetical $10,000 investment that grows at 10% per year. For the sake of illustration, we will say the investment was made into a vehicle with an unchanging growth rate. (For sure, it is not likely to find an investment that grows at exactly 10% per year, every year. To get a 10% rate of annualized growth, an investor would most likely need to be in the stock market, where the growth would fluctuate on daily basis).
As you can see, in the first year our investment only grows $1,000. Not bad but we well shy of a month’s pay for most people. The next year we only make $100 more which is barely noticeable as an increase. At this rate we seem to be getting nowhere as time flies by.
But by the end of year 8 we have doubled our investment. By the time we reach year 25, the $10,000 that garnered 10% growth in year one is earning 98.5% annual growth on the original investment. We almost make more in that one year than we invested at the start, and our initial investment has returned nearly 1,000%.
When One Lost Minute Cost Me 78
I will never forget the day I learned that lost time compounds. I was in my mid-twenties and having yet to learn how to prioritize, I was busy trying to do everything. I was chasing a doctorate in economics, running a business, teaching two classes, and dealing with new responsibilities at home. I packed more into everyday than I should and had little time to be unproductive.
On the fateful day, I was headed to my accountant for a quick drop off of a few documents. It would be a 10 minute drive there, 60 seconds to exchange pleasantries and drop the package off, and then a 10 minute drive back to my office. With a long tasks list and super tight schedule, that was about all the time I could afford.
I was in the car ready to leave when I ran back inside quickly for a Mello Yello (my driving vice). It took all of 45 seconds, but we can round it up to a minute for sake of simplicity. Now back in the car, I headed towards the street to make my way to the accountant’s office. As I reached the end of the driveway I was met by a giant trailer hauling construction equipment. It took several minutes to reach a place where I could get around it, with me regulated to 20 miles under the speed limit in the interim.
I turned on to the next street of my journey and was three cars back of a minor fender-bender. It was 10 minutes before the police arrived and had the motorists involved pull off the road so the rest of us could continue on our way. Finally moving, I was almost to the accountant when I was first in line to see the gates fall on a railroad crossing. I counted 113 train cars go by.
When I finally made it to the accountant (a good 30 minutes later than planned) I walked in to discover a ringing telephone followed by a “just a second” finger. It was a government official calling to ask questions pertaining to a case that my accountant was helping them investigate. The “just a second” was another 15 minutes.
Finally on my way back to my office, I found myself being stopped for a row of buses exiting the local grade school. It was probably 12 or 15 but it seemed like 125. By this point my frustration level was code red. The return drive was slowed to a crawl.
Follow the events with me…
No Mellow Yellow, no construction equipment…no construction equipment, no accident…no accident, no train….no train, no long phone call…no long phone call, no parade of school buses.
That extra 60 seconds to run inside to grab a drink turned a 21 minute trip into an hour and 39 minutes. I was not thrilled with what had transpired, but as I thought about it later I realized that there was a valuable lesson in what I experienced that day.
Final Thoughts
Just as we can save and waste money, we can save and lose time. Truly the principles of economics apply to minutes as much as they do to dollars. We are charged with being good stewards of the resources placed under our watch, and that most certainly includes our time.
Maybe we should spend less time on Netflix and Facebook, and more time moving forward towards our goals.