#172 Compounding Interest

What’s It Really Mean?

Consider this example… Would you rather have three million bucks right now, or a penny that doubles every day for the next 30 days?  Which would you choose?

Most people would pick the three million bucks…

This is a clear example of how the law of compounding works.  If you take that penny and double it every day for the next 30 days, you end up with over five million bucks.  That’s the power of compound interest.  It’s about the long game.

A little bit added in over time grows and grows.  A little bit more, a little bit more.  Suddenly, the numbers become astronomical.

Start Early

Start as early as you can because you cannot catch up.  It’s easy to think that $200 a month at age 22 isn’t going to make a big difference later in life, but it does. 

Let’s say you have $100.  You invest it and it earns 5% in one year… so that turns into $105.  It doesn't sound like a lot.  But the next year, if you earn a 5% again, you now earned 5% on $105.  And then it grows, and it grows and it grows and it grows.  That’s how the compounding effect works.

Take it from the greatest investor of all-time, Warren Buffet.  “If you’re trying to build a snowman, you have to start with a really small amount of snow.”  That small amount of snow then becomes a snowball.  Then you put that snowball on the ground and start rolling it.  Eventually you have a large enough snowball for the base of your snowman.

It's the same thing with money.  It's about building a sound foundation.  

Financial Discipline

Sometimes it feels like pushing a boulder up a hill, especially as an entrepreneur.  All by your fucking self.  It's very lonely.  Sometimes it feels like you’re getting run over.  But then you finally reach the top.  Once you reach the top, everything spills over, and you feel unstoppable.  Financial IQ, investing, and understanding runs parallel to this idea.

It takes both emotional and financial discipline to continue forging ahead when things aren’t going so well.  There are things that you want and there’s things that you need. 

If you don’t have enough money to buy that watch or jeans, you make a different decision.  Do you really need it, or can you deal with something a bit less so you can help yourself in the future?  It’s a different mentality.  A mentality of delayed gratification.

What if I want to retire at X age?  That means I need to have X amount of dollars by that retirement age.  Therefore, every decision I make from that point forward must guide me to that dollar amount.

It's the same in nutrition.  Yeah, I want that Oreo, but I know if I have that Oreo, it's not going to get me to where I need to be.  Am I one day closer or one day further away from my goals by eating this Oreo?

Having a Purpose

Most people will swipe their credit card and just buy the $200 pair of J’s.  No big deal.  You must shift your mindset with financial spending.  Let’s say there’s a watch that you have your eye on.  Shift your mindset to, “If I accomplish this, I’m going to buy that watch,” rather than “I’m going to get that watch.  I’m going to buy that.  I’m going to have everything.”

Our economy is based off consumer spending.  Consumers are continuously motivated to spend by the powerful marketing forces at work every day.  It’s why companies spend countless dollars on advertisements.  Most of these items aren’t going to bring you true satisfaction.  It’s very short-lived.

Break Out Your Calculator

Take a penny and multiply it by two… 30 times.  Watch that number expand and expand and expand.  In the last couple days, you're at $2.5 million.  You're like, whoa, how'd that happen?  And then you hit it again and you're at five and change.

Seeing compound interest work before your eyes is where the true power lies.