We all are aware of the Seven Wonders of the World which belongs to the well-known rich historical architecture around the world. But today we will be looking at the 8th wonder of the world. Which is none other than ‘Compounding’. Yes, you heard it right. Renowned scientist Mr Albert Einstein was so impressed with the power of compounding that he termed it the 8th wonder of the world.
What is Compounding Effect?
According to the summary of James Clear for the book The Compounding Effect by Darren Hardy. The Compounding effect is the strategy of reaping huge rewards from small, seemingly, insignificant actions. This means in order to get a compounding effect, you will have to start with small steps. At the start, the steps might look too small to make any difference but over the long run, it will reap a very significant change or will add a much higher impact in the form of reward.
How Compounding works?
When we hear the word compound we directly relate it with money and finance. So let’s take a financial example. You have $100 with you and you have invested it somewhere which guarantees you to give a return of 10% each year. So Your stats will be as follows
1st Year – Total gain $10 – Final Amount – $110
2nd Year – Total gain $11 – Final Amount – $121
3rd Year – Total gain $12.1 – Final Amount – $133.1
4th Year – Total gain $13.31 – Final Amount – $146.41
5th Year – Total gain $14.64 – Final Amount – $161.05
As you will see the gain that you countered keep increasing every year even though you didn’t do anything extra each year.
This happens because your principal amount keeps increasing each year on which the return is calculated. And thus even though you didn’t do any things you experience a compounding return.
Now, this effect is not restricted to only money and Finance but it can be experienced in everything.
Here is a graph of a youtube channel
If you see the graph preciously the channel got started somewhere in 2013 but till 2015 it had negligible views per day. In 2015, the channel started receiving exponential growth in its per-day views. What made it happen? What if the YouTuber had stopped uploading videos by 2015? He could have not seen this massive growth correct?
The power of Compounding will only be visible in a long term and does not have much effect in the short horizon. But the question is how long?
How long it takes to show up the compounding effect?
There is no fixed rule that determines or evaluates the effect of compounding unless you have some fixed stats to calculate it.
If we go back to the example of $100 we knew we will receive a return of 10% each year. Ten percentage return each year is a very respectable return in the investments world. But if we compare the same rate of return with the skills that you are working on or the growth of a youtube channel that too at the initial level of your career. Then the growth would not mean anything.
So calculating the compounding effect is difficult if you don’t have all the parameters that determines the effect.
Here’s what you can do
The very first things starts with
Believe
Before you start anything you need to believe in it. If you don’t believe in your investment, you will end up withdrawing the amount, if you don’t believe in the skill that you are learning, at some point you will leave the course. So belief should be the first thing.
And believe comes from insights, historical data, knowledge, etc.
Consistency
Consistency plays a very important role in achieving success. There is a very famous quote from Thomas Edison ‘I have not failed. I’ve just found 10,000 ways that won’t work. This basically shows consistency. If Edison was not consistence, he would have not succeeded. Most people fail because they fail to maintain consistency.
Acknowledge mistakes and keep Improving
When you start your journey, naturally you won’t do things in the most optimized and best possible way. You might do mistakes as well. As soon as you keep evolving and learning new things, you should acknowledge mistakes and try to fix them. It is not a one-time thing, it keeps happening now and then. The more you learn, the better you get.
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