The Beauty (And Danger) Of Compounding

Snowball effect

You will have noticed that over the past few weeks, I have really dialed back on the number of “quantitative” posts.

Gone are the rates of return, expected probabilities, and asset class comparisons. There’s plenty of time for those topics throughout the year.

Instead, I like to use December downtime to reflect on everything that has happened over the past twelve months.

Work finally slows down. Clients become less demanding. There’s an opportunity to spend extra time with the family.

In other words, it’s a perfect set up to help refocus the mind on the really important things in life.

Urgent projects and to-do lists fade into the background. Dreams, aspirations, and priorities come to the fore.

Thoughts and ideas bubble up to the surface. Waiting to be mulled over, refined – and ultimately implemented as I look to hit the ground running in 2021.

As it happens, one of the themes I’ve been coming back to repeatedly over the past few weeks is compounding.

The Eighth Wonder Of The World

This is when I’m supposed to wheel out that Einstein quote about understanding compound interest.

Except I won’t.

For one, I think it’s one of the most overused expressions in personal finance. I am also quite confident in your ability to use Google.

Most importantly, it’s because I am thinking about compounding in a non-financial sense.

For the moment, forget about your “number”, whatever it may be. Instead, imagine you’ve got a different goal in mind:

Writing a book

Learning to play chess

Running a marathon

Getting that next promotion at work

[Insert your own secret goal here]

Now, I am not a writer, but I am pretty sure that sitting down to write whenever you feel inspired does not make one.

Likewise, going out for a run whenever the weather is good (and you hadn’t knocked a few too many pints back the night before) will hardly build enough stamina to help you go the distance.

However, sit down to write for just 30 minutes a day, every day, and a year in you may well notice that the words you’ve typed into your laptop actually make sense.

Make a habit of putting on your trainers and closing the door behind you at 7 am sharp, rain or shine, and all of a sudden there’s an extra spring in your step.

A marathon may still be out of reach – but knocking off a 10k could well become a routine achievement.

It won’t be instant. On the contrary, you won’t even notice that discrete moment when what used to be a distant, blurry goal suddenly comes into focus.

But make no mistake – progress is being made with every word you type, every time you put one foot in front of another.

Consistency is the magic word here. Apply yourself for weeks, months, and years – and good things will happen.

In other words, you simply have to stay in the game.

Hidden Dangers

It all sounds great but sadly, we’ve only considered one half of the story here.

Yes, small incremental improvements in your lifestyle can amplify the quality of your life in unimaginable ways.

Unfortunately, the opposite is also true.

A cigarette won’t give you cancer.

A serving of French fries and a sugary soda won’t make you obese.

Taking a work phone call during playtime won’t jeopardize your relationship with your kids.

But repeat all of the above long enough, and you are guaranteed to put your health and relationships in danger.

And the further down you go, the harder it is to work your way back up. Not impossible, but you certainly aren’t making your job easier.

Kind of like trying to build wealth while being saddled with six-figure debt.

Reaching For The Stars

This is the time of the year when many people set their New Year resolutions.

Sixty or so days from today, most folks will have binned their aspirations – only to repeat the process again in a year.

The problem here isn’t a lack of dedication or imagination. The real culprit is the belief that in order to achieve extraordinary results, you’ve got to put in extraordinary efforts.

That’s simply not the case. Just ask anyone who has what you want. They will attest that their own journey didn’t start with a quantum leap forward.

Most likely, it was a tiny, wobbly step in the general direction of their long-term goal.

The only secret is that once they’ve taken that first step, they didn’t stop.

And neither should you.

Thank you for reading!

About Banker On Fire

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Banker On FIRE is an M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.

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11 thoughts on “The Beauty (And Danger) Of Compounding”

  1. These are all good points, it’s amazing how much change you can see from some small habit inprovements. For anybody this resonates with, I recommend the book Atomic Habits which expands on these ideas and also goes into the detail of how to form good habits and bin bad ones.

    1. I’ve had Atomic Habits on my reading list for a long while now as have also heard great things.

      For what it’s worth, James Clear also has a weekly newsletter which is quite good. Short, punchy, and to the point.

  2. Silicon Wanderer

    Joining an accountability group is a good way to make sure you don’t give up on habits you want to form. Just knowing that you’ll have to explain to a group of friends why you didn’t meet your goals last week is a great motivator!

    1. I agree. I’ve not come across the concept before but think that’s an excellent way to follow through on your commitments.

      Another one is writing a blog and having your readers keep you to account 🙂

  3. Nice post. Only discovered the true meaning of compounding a few years ago and that set me off on my FI journey.

    The really hard thing about compounding is the starting out, it takes a lot of effort to keep going and maintaining the consistency (something I am presently struggling with).

    There is a great article on the Blue Tree Blog that really summaries the power of persevering called The Hammer and the Rock Story. Kind of sums up the need to be patient at the start and then everything will snowball afterwards.

    But I also like your analogy about the downsides of compounding, the building up of bad habits.

    1. Not giving up is crucial. This is why starting small is such a wonderful strategy.

      Much easier to stick to habits that way, and soon enough you’ve gained so much momentum that you won’t want to give it up.

  4. Completely agree, I’ve managed to claw myself inch by inch from a life no-hoper to a successful career, a degree, a host of vocational certificates, a home in a nice area and substantial pension savings. How did I do it? In a time before FIRE and Internet blogs i worked out it needed loads of small incremental changes, over time with the discipline to keep going. There is a point where there is a eureka moment and it all gets a lot easier because you are just adding to what you already have. If I was to pick one thing for me, getting up before 7am and going for a run in the dark, rain, snow, hot, cold is the key because it all starts with good mental health.

    1. It’s fascinating how much you can accomplish when you are in the right state (physical and mental as you say) to take on the world.

      For me, weightlifting has always been the activity that makes me feel like I can move mountains.

      It’s much easier to compare notes these days with internet – tough to believe only two decades or so ago we had to figure things out indepedently, with just books to guide us along.

  5. Accountantonfire

    Nice one, BOF. I just start reading the Atomic Habit book and it appears to align with what you are saying. We are the creature of habit and it’s important to be conscious of what we are doing on daily basis before we can make the small changes which can make the big difference.

    Great post to start a new year! And a happy and successful new year to you!

  6. Pingback: Wednesday Reads: Happy New Year! - Dr FIRE

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