#3 - The Compound Effect

“The real cost of a four-dollar-a-day coffee habit over 20 years is $51,833.79. That’s the power of the Compound Effect.”

Darren Hardy

I've always regarded self-development books suspiciously, at least until I actually started reading some of them. The reason I started doing so is that there is often only but a thin barrier between the fields of personal finance and personal development. (This applies both to the literature on those subjects and to life itself.) In other words, becoming rich is often the end result of a process of personal development just as much as it is a consequence of financial education or hard work. This symbiotic relationship between the two fields finds a perfect illustration in the book Think and Grow Rich by Napoleon Hill, which shows how our thought process deeply conditions the success we achieve in life, economic or otherwise. Think and Grow Rich is both a great personal development book and a brilliant treatise in personal finances and has helped millions of people achieve great success in life. In fact, in the future I might dedicate an entire post to Napoleon Hill's seminal work, but this time around I want to tackle another book that can help you succeed both in your finances as well as in other aspects of your life. That book is a modern classic amongst entrepreneurs but is just as much about life in general as it's about business and investments. The title of the book is The Compound Effect, and it was written by Darren Hardy, a former publisher of Success magazine.

In The Compound Effect Hardy presents us with a plan that has the potential to completely change our lives for the better. Although like any other plan it will be wasted on someone unwilling to take action, I believe that if one is willing to put in the necessary time and effort, Hardy's plan has the potential to transform lives. In fact, I came across this book several times whilst listening to interviews with some of the greatest real estate agents and investors out there. This is a very important fact, since several people who achieved massive success in their lives did so partially by reading this book and other similar works. This just goes to show that this book is not just theory or self-help commercial mumbo jumbo. This stuff works, just like all the best self-development books out there also work.

Firstly, I want to introduce the incredibly powerful concept of compounding, something that can certainly be a big help in all aspects of your life if you use it right and is at the heart of Hardy's theory. Basically, compounding happens when you put something relatively small (it can be energy, money, actions, habits, etc...) to work, repeatedly and consistently, over a long period of time. The effect of compounding turns that initial "small something" into a future "big something" through exponential growth which is produced by consistent effort multiplied by a number of days, months or, more commonly, years.

A lively way to see the compound effect in action can be found in the following scenario: imagine I ask you to choose between one of two things. You can either 1) have a million dollars immediately or 2) a simple penny whose value doubles each day for the duration of a month. The vast majority of people has a quick answer to this question: Give me my one million dollars now! Let us assume, nevertheless, that you chose the penny. On the second day, you'll have two pennies. On the third day, you'll have four and so on... by the end of the tenth day you'll still only have 10,24$ which is a far cry from a million dollars, and you will probably start getting nervous... in fact, by the end of the twentieth day you will likely be feeling even more stupid since your money will "only" have grown to 10.485,75$, which is not bad considering you started with just a penny but is still very, very far from one million! Yet, if you waited a little bit longer, things would start getting better fast. By the end of day 25 you would be making 335.544,32$ and two days later you would finally be up, standing to receive 1.3 million dollars and with three days left to let it grow some more. By the end of the thirtieth day you would stand to receive a total of 10.737.418,24$, grown from that single penny on day one, at a daily interest of 100% over a 30 day period! Is it magic? It's a sort of financial magic no doubt, but it's really called compounded interest or compounded growth. It's the compound effect at work!

The example above perfectly demonstrates why compounded interest is one of the most powerful forces in finance and one of the best tools you can use in your quest to become financially independent. In reality, few other things can transform small quantities of money into true fortunes like compounded growth. Study this concept.  Memorize it.  Nurture it in your mind. It can become one of your most powerful allies if you let it. And as Darren Hardy demonstrates in The Compound Effect, it can also be applied to any area of our lives, not just money and interest rates. You can apply the power of compounding to fitness, happiness, sports, friendships, your career or even your love life. The possibilities are endless if you understand the compound effect and put it to work in your favor.

Hardy explains in his book how simple things have massive impact on our lives thanks to the exponential growth throughout time. Things such as small choices, seemingly unimportant habits or our everyday influences, such as the news we listen to, the shows we watch or the people we interact with. Hardy shows how, at the end of the day, these little things end up shaping us and defining us as long as they are constantly repeated throughout time. As such, small changes that affect little things can end up having massive results and change us completely due to the compound effect.

Hardy identifies three major categories of things that produce the effect described in the previous paragraphs. These are 1) the choices we make, 2) the habits we develop and 3) the influences we cultivate. He tells us that, by controlling them, instead of being controlled by them, we can create the lives we really want. It is all about being mindful of the things that shape our lives and start controlling them, thus changing our lives in the process.

The interesting thing is that, although such changes to choices, habits and influences are small at first, they will, in time, and due to the action of compounding, lead to major, life-altering results up ahead. It's all about taking action to make a change, sustaining that action through a considerable period of time and letting the compounded growth take place. To give an example used by Hardy in the book, the choice to cut 125 calories from one's diet is a very small change, easily achieved by having mustard instead of mayo on your sandwich or having one less cup of cereal for breakfast. It's really not a big deal and it won't produce much of a difference on the short-term. On the long term, however, if maintained, this habit can have convincing results. Let's say we cut 125 calories from our diet for 31 months (940 days). That's 125 calories less times 940, which amounts to 117.500 calories saved. Since each pound amounts to 3500 calories burned, a total of 117.500 calories saved lead to a loss of 33.5 pounds (15.2 kg) in 31 months. That's a big change that derives from a very small change in one's routine. Even though the action of saving 125 calories in one day is seemingly small, when followed scrupulously throughout a long period of time,  it can lead to major results, in this case, a substantial reduction in one's weight. It is thus evident that small changes in choices or habits can indeed lead to big results overtime thanks to this ripple effect. The only question is, do you want this to work in your favor or against you?

Assuming the answer is that you want to use the power of compounding to your benefit you must harness this power by creating the habits, making the choices and choosing the influences that will lead you, somewhere down the road, to the life you want to have. Remember, small yet meaningful changes can, over time, lead to major results.

After you read this essay, reread it, and then think about it. Really think about it. There are very few tools as powerful as this one both in finances and in life. If you use it right it can make you successful. If you allow the compounding effect to work against you, it will prevent you from ever becoming who you want to be in this world or lead the life you want to lead.

One last thing. Like Hardy says, information without implementation is the start of self-delusion. Knowledge will only work in your favour if you actually put it to use. So do it now! Take action! Go read The Compound Effect by Darren Hardy and then read other self-development books and books about finances and investments. And don't stop there! Apply the concepts you learn in your life. Adopt the right habits. Make the right choices. Choose the right influences. Buy real estate. Buy your first stock or your first bond. Lose weight. Gain some muscle. Become who you wanna be in life. Think, act and grow successful, or die trying... just make sure you really try!