An Introduction to the Compound Effect

How would you like to make $1,000 in the next 12 months? How about $10,000? What if I told you that you could do this in the next 6 months?

You’d be impressed, right?

The compound effect is a secret that many wealthy and successful people have been using to rapidly increase their income over the last few decades.

But what exactly is it, and how can you use it to your advantage? The following introduction will tell you everything you need to know about this powerful financial tool.

Compound growth story

Let’s quickly recap the origin of chess game.

The king offered one wish for the creator of chess game. The wish was “Put one rice in First Square and double it in other square. Then double it in the next square. Do it until the 64 squares and give me the total rice in it”. This was his wish, seems silly isn’t it.

But let’s take a minute to do this calculation.

• 1^st square= 1 rice
• 2^nd square= 2 rice
• 3^rd square= 4 rice
• 4^th square = 8 rice
• .
• .
• 17^th square = 65536
• .
• 33^th square = 4,929,967,296
• .
• 64^th square = 18,446,744,073,709551,616

Wait, the game is not over yet,

18,446,744,073,709551,616 rice equals to 461 billion metric tons.

You know what, the value of that rice equals to 300 trillion dollars. I hope that’s the total wealth of world.

That’s why the scientist Albert Einstein stated that “Compound interest is the 8^th wonder of the world, those who understand it earns. Those who don’t pays”

Now you may feel the little sense of what is compound effect.

First let’s learns some basic fundamentals and financial steps of the compound effect.

Start with baby steps

It doesn’t matter how big your vision is, or how much money you want to make. Start with small changes, and focus on creating a habit.

If your dream is to make $1 million per year, you won’t get there overnight. But if you can create a spending plan that results in earning an extra $100 per month, then set aside 50% of that toward savings, and eventually invest it for growth, one day at a time.

Baby steps add up over time. Small consistent improvements will not only change your life in 10 years. They will also change your life today.

The compound effect works when you start with baby steps because it requires patience.

But don’t rush yourself increase speed gradually. Eventually, as consistency creates compound interest.

You’ll be adding hundreds or thousands to each paycheck without even noticing it. As your expenses decrease and your income increases, you’ll find yourself financially free sooner than expected.

You just have to start today. One day at a time!

Measure your results

After you’ve begun measuring results, take a step back and evaluate how things are going.

Are you seeing improvements? If so, that’s great.

Take another look at your goals, figure out what’s working and keep doing more of it. However, if you haven’t seen any improvement, or if things seem to be getting worse, you need to make changes.

Figure out what isn’t working and ditch it so that you can get back on track towards your goals quickly. Otherwise, you may not meet your long-term financial goals when it comes time for retirement!

You may not have a perfect at anything first. But by spending just 20 minutes each day sharpening that skill, you’ll start improving with each iteration. Before long, you’ll become better than 95% of other people in that field and be able to charge more for your services as well!

Repeat the process again and again

The compound effect is a long-term approach, where slow and steady progress is made over time.

While it’s more laborious than a short-term effort, compounding interest can lead to huge results over time.

This concept is used in investing, and many people use it to increase their earnings.

If you set aside some amount of money each month for twenty years, that sum would make an enormous difference in your retirement portfolio.

In life, you might put off bettering yourself for too long, thinking there isn’t enough time, but when you look back on it all at 65, forty years from now probably seems like plenty of time.

Don’t wait to start making healthy choices today—you’ll thank yourself later.

Practical quiz

As in the earlier we read the chess story. Now answer to this question quickly,

Choice 1: You will get 100 million now

Choice 2: You will get 1$ now and the money will be double for every day for 1 month.

What would be your choice?

Alright let’s do the math again here,

• 1^st Day= 1 $
• 2^nd Day= 2 $
• 3^rd Day= 4 $
• .
• 21^th Day = 1,048,576 $ = 1 million dollars
• .
• 27^th Day = 67,108,864 $ = 67million dollars
• .
• 30^th Day = 536,870,912$ = 536 million dollars

You can see upto day 27 choice 2 still worth low than choice 1. But last 3 days the compounding exponentially pass the choice 1 by 5 time great.

If you are like normal people you would probably choose the choice 1. But hope this compound effect may enlighten you about the truth and you selected choice 2.

Final Tips

Long term thinking is something most people neglect when planning out their goals.

Long term planning is a skill that needs to be developed, however many small actions done consistently and over a long period of time can generate large positive outcomes.

Take Ray Kroc, the founder of Mc Donald’s he started as just one person with an idea and transformed it into one of the biggest franchises in history by getting his foot in one door after another.

He constantly kept his eye on where he wanted to go rather than get caught up in individual doors or specific jobs.

When asked what would be best for a long term approach he simply said Small gains, repeated daily over time.

So have faith in your ability to succeed if you remain persistent and think about achieving things not once but multiple times for consistency and victory will eventually come your way.

The real life sample

As you are in finance field you may heard the billionaire Warren buffet.

Here is the net worth accumulation overtime by his exponential compounding strategy.

His last 20 years net worth is way higher than his past 60 years of net worth.

Author’s disclaimer

Make sure you learn these secrets so that your long-term success will compound exponentially,

• Use every opportunity offered to network with people
• Stay focused
• develop discipline
• Remain committed to being better
• avoid distractions while working on important tasks
• Use benchmarks
• measure progress
• Learn how to automate works