The Compound Interest of Everyday Life

Each day we wake up, we are met with a series of choices. We choose to get out of bed or call in sick, make healthy meals at home or eat takeout, call loved ones, or spend another 15 minutes on TikTok. It’s estimated the average adult makes over 35,000 choices each day.

Some of these choices don’t even seem like choices at all. For many, drinking coffee each morning, eating breakfast, and going to work are non-negotiables. When these decisions become so ingrained in our daily lives, we start to unconsciously make them, forming what we call “habits”.

When we choose to make the same choices over and over again, we are likely to see improvements in that given area. For example, brushing your teeth every day leads to strong gums, pearly whites, and less stress about cavities before your annual dentist appointment. In some areas, these gains even grow on themselves, accumulating greater rewards at an exponential rate.

To economists, bankers, and the overzealous finance “guru” that you can’t escape on your LinkedIn feed, these incremental gains can be most likened to interest. Interest in the investment world is the financial return experienced from putting one’s money into an investment vehicle like stocks, bonds, or gold. Interest is earned when the value of your investment (otherwise known as your principal) increases to more than you originally invested.

Diving deeper, the gains one initially experiences on their principal is known as “simple” interest. When one chooses to reinvest this cash and accumulate additional gains on their principal plus the simple interest, the magic of compound interest begins to unfold. In a nutshell, compound interest is the interest on savings calculated on both the initial principal and the accumulated interest from previous periods (aka interest on interest).

I say this phenomenon is like “magic” because the returns one can observe over long periods can be mind-blowing. The short clip linked below demonstrates this idea through the fable of the magic penny that doubles in value every day for 30 days, being worth millions by the end of the month.

The power of compounding interest in finance is best observed through Warren Buffet’s wealth across his lifetime. Over 99% of his 100+ Billion-dollar fortune today was made after he turned 50. He once proclaimed, “My wealth has come from a combination of living in America, some lucky genes, and compound interest”.

As far as personal finance goes, time is our best friend, and the longer we are in the market, the more magical it will be.

Despite being most often used in the investment world, the power of compound interest is present in all facets of our lives.

Take for example going to the gym. When you consistently hit the weights or the treadmill for years on end, you build up a physique that is much more resistant to change than one built with extreme dieting and exercise over a few months. Furthermore, the simple act of doing the same thing across time makes that action automatic. There simply isn’t an alternative. Challenges like 75 Hard or Christian Bale’s 6 weeks of extreme preparation for “Batman Begins” can be wildly effective in the short term, but extremely difficult to maintain both physically and mentally.

Alternatively, after working out for years, skipping leg day or slinging back a few extra High Noons on Saturday won’t hurt you. The positive feedback loop that you have established has effectively bullet-proofed your physique and mind from change.

Unfortunately, compound interest doesn’t just work in our favor. The choices we make over time that can lead to unseen levels of wealth and health can also lead to spiraling debt and seemingly unbreakable bad habits.

At its least sinister level, these compounding effects may make it more difficult to stop hitting snooze after doing it every morning for months. Yet, when unchecked, the magic of compounding can lead one down even more nefarious paths.

As I talked about in one of my previous articles, social media, and the internet at large have a subtle way of feeding us political content that reinforces and strengthens our previous beliefs. The more of that same content we consume, the more dicey the future content we receive, and in turn the more extreme our views become. Very quickly, one can find themselves in a rabbit hole of IG posts and X threads that they would have blown off as conspiracies only days prior. Extremist ideology today that is exceedingly present on both the left and the right may be driven by the same exponential patterns found in compound interest.

Albert Einstein was spot on when he stated, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”

Despite being the very bedrock of sound investing strategy and omnipresent in all aspects of our lives, we cannot seem to apply it correctly in finance or life.

According to a report from Bankrate, more than 51% of 2,225 U.S. adults surveyed have taken an early withdrawal from their retirement accounts. While the benefits of liquidity now may seem like the right move in the short term, the costs in the long term are huge. Penalty fees eat up 20-50% of the money withdrawn, with thousands more of future compounded interest lost in mere moments.

Due to our collective inability to put these principles into practice, a trillion-dollar financial planning and retirement industry has emerged that profiteers off of describing to individuals the importance of having patience.

As humans, it is incredibly challenging for us to be able to use foresight when making important decisions. Since our inception, our brains have been hardwired to focus on the here and now rather than the future. Furthermore, the linearity of our thinking causes us to overlook the exponential nature of making the right decisions in the long term. We simply cannot comprehend that doing the same thing again and again could lead to anything but linear results.

The principles of compound interest are steadfast and true, but only when applied correctly.

So, how can you best put compounding to work in personal finance and your day-to-day life?

Systemization

The best way to do something for a reallllly long time is when you don’t have to think about it, ever.

For example, many people fail to consistently put money in the bank each month. Why? Having to open up your account every month, select the amount of $ that now can’t be dropped on a new pair of Lulu’s, and transfer it to your Roth IRA takes a lot of discipline. Doing the same thing over and over, especially when it leads to internal conflict, is hard.

The easiest way to avoid this is by automating from the get-go. Banks allow you to set up automatic withdrawals, calendar apps can provide timely notifications, and an array of generative AI applications have unlocked entirely new ways to streamline your life and work.

On the flip side, breaking bad habits can be incredibly difficult, but made much easier if you can locate the source. By removing the cues that guide these bad systems, you can break the negative feedback loop.

To clarify, if you cannot stop “doomscrolling” on your feed, I am not suggesting you simply delete the app altogether (I did this, and 10/10 would not recommend). Instead, setting limits or removing the app from your home screen may be a good place to start. To break these habits and stop compounding losses, you must find solutions that systematically work for you.

Time

While it may seem obvious, time is the foundation of exponential growth. Despite this, it seems like just about everyone is in a rush.

On YouTube, Hustle Bros sell courses on how to make your first million online in a week. On LinkedIn, AI experts preach the top 5 best ways to use ChatGPT to get stuff done 10x faster.

We are bombarded with productivity hacks and easy ways to “get rich quick” by people who know very little about what being productive or wealthy even means.

It makes sense. Alongside all the productivity gurus, we see stories of other people seemingly making it overnight, that small proportion of individuals who are defying the norm with rapid success. Yet, the reality is that most people are not part of this cohort of early achievers.

The surest way to not achieve anything is to try to achieve everything, all at once, tomorrow.

When it comes to the benefits of compounding interest in health, wealth, and life, the best person to listen to is your clock.

At the end of the day, it all comes down to putting in the work even when you think it’s pointless. As the author of The Subtle Art of Not Giving a F*ck Mark Manson put it, “Motivation is a fickle mistress, but discipline isn’t”.

The biggest reason we often fail to see the effects of compounding interest in our own lives is that we get bored and quit.

We all have things we started but never finished. Books, workout plans, New Year’s resolutions: despite being well-intentioned, we often move on to the next pursuit before we see the one prior through. Yes, in the beginning, progress may seem abysmal.

If you were to look at the history of homo sapiens on Earth from 10,000 BC to 1000 AD, the total population never exceeded that of the modern-day U.S. (~330 million people). Yet, in the last roughly one thousand years, only 1/11th of the time, we’ve grown to over 8 billion people.

Seemingly out of nowhere, the world grew to unimaginable numbers, but this was only possible because of time.

To see exponential returns, you have to stay the course.

Hustle Culture

Our world today is dominated by the 1%.

A very select group controls most of the power as it relates to wealth, politics, and social influence. With social media and the internet, this reality is only made more apparent to the other 99% every day. Due to this, many people quit trying to do anything out of the ordinary before they’ve practically even begun.

While this may seem unfair and you could argue at length about the inequities of opportunity, one of the biggest reasons this 1% exists is because they choose to stay in the game longer than everybody else.

A Reddit thread I’ve seen circulating on the top 1% of the podcast industry explains it best:

“To be in the top 1% of podcasts in the world you only need to publish 21 episodes of your podcast”.

While time doesn’t necessarily guarantee success, it’s the easiest way to root out the competition and see exponential growth in any pursuit.

It doesn’t matter if you're trying to break a bad habit, invest in your 401k, or stand out in your industry. If you can systematically and consistently make the right decisions over time, you can turn small choices into exponential changes.

-John Henry

Thanks for reading 🫡

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