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Compound Interest: Your Secret to Health and Happiness

Success is a compounding not linear process. The difference is key.

Key points

  • Compound interest is one of the most important and misunderstood ingredients to health and happiness.
  • Compound interest is misunderstood because its effect is nonlinear. This makes compound interest effects counterintuitive and confusing to most.
  • If you wish to experience great success in your health, relationships, or finances, compound interest is your best friend or worst enemy.

If you really want to prosper in life, achieving a deep understanding of compound interest is essential. A failure to understand compound interest is a primary reason many people fail their New Year’s resolutions, spend middle and older years in declining health, and end up on Social Security.

Yet the most dangerous thing about compound interest is that it doesn’t require your understanding or attention to affect you. Compound interest is shaping your life across multiple dimensions right now, whether you recognize it or not. And unless you become conscious of the profound effects of compound interest and begin using them to your benefit, you will be the unconscious victim of these forces.

How powerful are the forces of compound interest? In the words of Albert Einstein, a scientist not known for exaggerating, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”

A story from Indian mythology illustrates the power of compound interest. This story describes a game of chess played between a wealthy king and a deity disguised as a traveling sage. If he was victorious, the sage asked the king to pay him in a grain of rice for each of the squares on the chessboard, beginning with a single grain and doubling with each of the subsequent 63-squares. The king did not think to calculate what seemed to be a modest prize until he lost. He realized that the total compounded to a staggering 500+ billion tons of rice! Here's a video of the story.

Another demonstration of compounding interest effects is the wealth accumulated by Warren Buffet. Buffett began investing at the tender age of 12, investing “self-funded” by the money he made delivering newspapers. As he consistently invested and increased his investment knowledge over time, his wealth grew in accordance with compound interest principles.

By age 30, Buffett went from a few dollars to a full million dollars in his portfolio. This was a lot for a 30-year-old, but not something that would turn him into a household name. It was only with additional years (think of money and years like grains of rice and squares on a chessboard) of persistent investing that he achieved his first billion in his 50s.

With further compounding, he was worth >15 billion by 65 and >85 billion at age 88. Notice that Buffett began investing so early. He has now been investing and compounding his interest for more than 75 years.

The effects of compounding interest over time are why it is so important to begin your investment habits, exercise habits, nutrition and sleep habits, reading and learning habits, etc., as early as possible – or at least as soon as possible – to give your future self the gift of compounding. See more of Warren Buffett's story.

Image by OpenClipart-Vectors from Pixabay
Source: Image by OpenClipart-Vectors from Pixabay

As dramatic as these examples are, do not be deceived: Compounding effects are not limited to rice grains or money. And they can either help or harm (e.g., compounding harms of smoking and alcohol abuse, poor nutrition, exercise, and spending habits over time) depending on the application. They apply to your career, parenting and romantic relationships, and health and quality of life. Whatever area of life you consider important, however you define personal success, compound interest effects are shaping your results.

Compound interest effects are non-intuitive to us because they are non-linear. The human brain, by default, thinks linearly. We expect, for example, that our time, money, and effort will be rewarded in proportion to how much of them we invest. But this isn’t how it works at all. Instead, assets such as time, money, and effort often yield minimal rewards at the beginning. Faced with disappointing initial results, we often give up, but not just because of this short-term outcome.

Instead, we believe the relationship between effort and result should be linear. We also believe that the poor payoff we obtained from our initial effort means that the same result will continue. So, we don’t continue. In reality, the poor initial payoff we experience is often working beneath our awareness like those meager initial doublings of rice grains on the chessboard or the humble initial dollars of investment in Buffett’s portfolio.

Despite the modest beginnings of our exercise, nutrition, weight loss, or learning efforts, the effects of compound interest will reach a point when the payoff becomes enormous. We just have to be patient and persistent long enough to get there.

Experts such as James Clear, author of Atomic Habits, write extensively about using the principle of compound interest for habits, whether they apply to health, wealth, or happiness.

Regardless of your goals, the potential that results from compounding interest requires three critical behaviors from you and me:

  1. Starting – not with how much you start or how fast you start but just starting.
  2. Consistency – avoiding lapses, doing at least a little even if you can’t do a lot, bouncing back quickly from bad days.
  3. Make time, your friend – patience and perseverance; thinking long-term; resisting short-term impulses and distractions.

Whether you want six-pack abs, a million dollar portfolio, or an amazing marriage, the choice is clear: either make compound interest your greatest ally, or it will become your fiercest adversary.

More from Thomas Rutledge Ph.D.
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