Harnessing the power of compounding for an exponentially richer life

richer life

When we think about compounding, we often associate it with financial success, but other areas of life—activities, travel, learning, ideas, marriage, friendships, clients, contacts, freedom, health, hobbies, religion—compound in a very similar way.  Each time we get a small win in one of these areas, we can put it to work to help us grow and bring on bigger, better wins.  It’s like earning interest on our interest, but the payoff is a richer life rather than just a richer portfolio.

This is a powerful idea and, with New Year’s Resolutions just around the corner, a timely one as well.  As you plan for the coming year, keep in mind that the things you do with your life in the years leading up to retirement can have a huge impact on how rewarding your retirement will be.  Why?  Because with compounding, the really interesting payoffs come at the end.

That’s why Warren Buffett earned 99% of his wealth after his 50th birthday.  Not because he somehow became a better stock picker as he got older, but because that’s when the big dollars started compounding.  But he never would have gotten to that point if he hadn’t been a good steward with the small dollars.

He made his first trade at age 11 with about $200.  Over time $200 became $400 and then $400 became $800.  Pretty soon, thousands became tens of thousands, which became hundreds of thousands, which became millions and eventually billions.  When you look at the chain of returns, you realize that the trade that got him from $1 billion to $2 billion wouldn’t have happened without the trade that got him from $10,000 to $20,000.  The earlier trades weren’t as interesting because they didn’t have as many zeros, but they were absolutely essential.

Non-financial compounding

Since other areas of your life can compound in a similar way, then retirement is a time that can really be exponentially cool—IF—you spend the years leading up to retirement doing the things you need to do to build your “capital” of friends, skills, experiences, self-awareness, etc.  Unfortunately, we often get wound up in one or two things at the expense of others during our pre-retirement years.  For example, we focus on our stuff at the expense of our relationships or our careers at the expense of our health.  We promise to get to the other things “Someday.”  Then we get to retirement and rather than getting interesting payoffs in the areas that matter most, we’re stuck getting from 1 to 2, 2 to 4 and so on, without enough runway to get to the really interesting numbers.

This is why I’ve often said that delayed gratification is overrated.  Not because I’m impatient, but because I know that if I only start to live when I hit some predetermined age (like 65), it will be like Buffett waiting until his 5th or 6th decade to start investing.  He’d still be a brilliant guy, but he would run out of time before the numbers got interesting.

And no, it’s not lost on me that sometimes non-financial compounding is at odds with financial compounding.   A dollar spent today on travel or a date night with your spouse is a dollar that you won’t be able to add to your compounding assets tomorrow, but if you spend it wisely, you’ll have something else—experiences, memories, strong relationships, skills, etc.—that will then be able to compound and produce greater and greater returns over time and bring you much meaning, happiness and fulfillment.  It’s up to you to find the balance between the financial and non-financial that makes the most sense for your situation.  Invest wisely in both.

Seneca once said: “Life is long enough, and it has been given in sufficiently generous measure to allow the accomplishment of the very greatest things if the whole of it is well invested.  But when it is squandered…we perceive that it has passed away before we were aware that it was passing.”

Ponder that thought and the aforementioned ideas on compounding as you reflect on the past year and begin planning for the next.  And if you’d like a little help with your planning, just a quick reminder that The Ideal Retirement Design Guide is 40% off for the holidays.

Have a great weekend!

Joe

No comments yet.

Leave a Reply