Later On

A blog written for those whose interests more or less match mine.

The Rule of Compounding: Why Small Steps Lead to Big Gains

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I have often failed to apply the idea of compounding to non-financial settings. The power of compounded interest is well know, but the idea can be generalized. In my Nordic walking I found that if I walked consistently (daily), then after some weeks — even though I was not trying for it as a goal — I was walking longer distances at a faster pace and enjoying it more. So I changed my focus from trying for longer distance or faster speed to simply making sure I walked daily; the distance and speed then took care of themselves, and I enjoyed the walks more.

Similarly, as I have continued to apply myself to figuring out how to manage my personal budget, I kept making small changes and improvements to the point that I now feel quite comfortable in my finances — something that I did not feel for too many years. But I got there through making small changes and adjustments from month to month.

And Covey’s 7 habits are built on methodical attention to consistent effort, week after week, toward important goals that are not urgent. The payoff over time is enormous.

The Growth Equation has a post that generalizes the idea of compounding:

Growing up, long before he experienced success and became worth billions of dollars, a young Warren Buffet would tell his family and friends, “Do I really want to spend $300,000 on this haircut?” The haircut he was referring to, of course, wasn’t in the six figure range. It probably would have costed him closer to $20. Buffet’s point was that if he cut his own hair, saved the monthly $20 expense, and invested it, over the course of his life all of those seemingly insignificant $20 investments would have netted him thousands of dollars. Buffet was speaking to the law of compounding gains, which goes something like this: small investments made consistently over time build upon themselves and, eventually, amount to something big.

“Recognizing that every dollar you spend today is $10 or $100 or $1,000 you won’t have in the future doesn’t have to make you a miser. It teaches you to acknowledge the importance of measuring trade-offs. You should always weigh the need or desire that today’s spending fulfills against what you could accomplish with that money after letting it grow for years or decades into the future. And the more often you trade, the more likely you are to disrupt compounding and to have to start all over again,” writes Jason Zweig in the Wall Street Journal. 

Compounding isn’t just useful in finance. It is a principle that applies to all of life. Brushing your teeth every day is a small investment. If you skip it, nothing bad happens on that day. But if consistently skip it, those small “not so bad days” add up—and you are left with a costly, both financially and in terms of human suffering, dental disaster.

Some other areas where compounding gains matter a lot:

• Eating your vegetables.
Physical activity.
• Making time for intimate connection with your loved ones.
• Practicing an instrument.
Meditation (or other forms of contemplation).

In all of these examples, you build on what you did today tomorrow. You start the next day just a little bit better, often so little you can’t even measure it, than you were the day before. But if you add up those increments over the course of a lifetime, the result can be massive.

Another important lesson related to consistency and compounding is this: It is harder to make up loses than it is to accrue gains. For simplicity’s sake, imagine that you have $1.00 and it goes down 50 percent. In order to get back to where you started, you must double your 50 cents; or put another way, you must go up by 100 percent. The same goes for so many endeavors beyond finance. If you attempt a heroic effort and it goes poorly—for example, you go for broke in sport and wind up injured; you go for broke in a relationship and wind up in way over your head; you go for broke in diet and wind up with an eating disorder—getting back to where you started is going to require a lot more effort than the potential gains that you lost.

Put simply, if you go big or go home you often end up home, and with a long journey to get back to where you started. If you go small and steady over a long period of time, however, you often end up with something big. Are there exceptions to this rule? Of course. If you are in t

Continue reading.

Small gains are easy to achieve, but because they are small, they are undervalued. But if you consistently make small gains, every day or every week, in time you will have achieved a big gain. “Many a mite makes a mickle.”

I suddenly remember a person who said to spend an hour every day studying some topic — his example was real estate. He started knowing little, but within a few months he had a fairly broad knowledge, and after a year or two he had expert knowledge.

Another obvious example: Learning a language. You don’t learn much on any one day, but if you are consistent in your study, day after day, you will in time achieve mastery.

As my grandmother often told me, “Slow and steady wins the race.” That idea is easy to understand but seems to be difficult to absorb — to internalize to the degree that one consistently applies it in life, day to day and week to week. I think one reason people cannot absorb the idea (and thus apply it readily, from within) is that the idea bounces off the shell of impatience with which many wear as armor. They try something for a day or two or three, see no real gain, and quit. Bad idea. Instead, persist.

Update: As I reread this, I saw that the underlying foundation was patience (in addition to persistence). Some years back, I came to the conclusion that patience is a skill and thus is acquired through practice. Impatience is just a beginner error (like a wrong note in playing the piano) and means only that we need to continue to practice, perhaps working on that particular situation to find ways to combat the impatience.

For a small example: in the kitchen I find myself waiting for various things — the water to boil, the tea to steep, the food in the skillet to start to cook. I was impatient until it occurred to me to exploit the time, so when I have those moments, I do little tasks: empty the ice-cube trays into the bin and refill the trays; put the dry dishes away from the drainer; wash dishes in the sink, put away things from the counter, and so. I now fill the time instead of waiting it out.

Other occasions of impatience will call for other remedies.

Written by Leisureguy

7 September 2022 at 9:34 am

Posted in Daily life

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