The power of compound interest is extraordinary over the long run
Mathematically speaking, what you do every day has a drastic effect over the long run. It means that your daily habits truly matter. Daily self-improvement of 1% will compound into a +3,678% gain in a year.
1.01³⁶⁵ ≈ +3,678% gain
Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … He who doesn’t … pays it”.
- 0.99³⁶⁵ ≈ –97% loss
- 1.00³⁶⁵ ≈ no gain
- 1.01³⁶⁵ ≈ +3,678% gain
If you want to be 100% better than your current self next year, you need to become 0.19% better every day. It’s also worth noting that your improvements are relative to others.
If others are improving, but you are not, then you will lag behind — the relativity in improvement. If everybody improves by 20%, but you stay at the same spot, then you essentially got worse by 20%.
Compound interest also has another special effect — the earlier you start, the better off you will be in the future.
- If you invested $100 in the S&P 500 50 years ago, the market value today would be $7,500.
- However, if you invested $100 in the S&P 500 25 years ago, the market value will only be $860. (almost 10x fewer returns)
Knowledge is compounded.
Similarly, knowledge is also compounded. The earlier you learn something, the faster you can use it as a foundation to learn other stuff. For example, if you already know the basics of programming, then you will always have the foundation to be ready to learn other advanced topics. Being ready to learn more is like having enough cash for a once-in-a-lifetime investment opportunity.
Intellectual capital works just like financial capital. The concept of compounded return is common in investing and finance, but it’s rarely applied to self-improvement. If we start viewing our time and each of our daily activities as an investment opportunity, then we might be able to optimize our time a lot better.
Learning doesn’t stop after traditional universities and colleges. It’s a lifelong process where we constantly optimize and maximize with joy and excitement!