Einstein wrote that compound interest is “the eighth wonder of the world,” and that “He who understands it, earns it… he who doesn’t… pays it.”
As a financial concept, compounding is the art of accumulating gains on top of prior gains. Compounding happens when interest is not only earned on the initial (principal) amount, but also on the accumulated interest from previous periods.
Most people intuitively grasp the power of compound interest when it comes to investing money. But we often miss how this same principle applies beyond finance. You should leverage the hell out of this concept to cultivate more than financial wealth.
The person who practices violin for 30 minutes daily will progress far more than someone who practices for three hours once a week. Your friend who checks in briefly but regularly likely feels closer to you than the one who makes a grand gesture once a year. Small, consistent efforts, like daily deposits, are helpful for building everything from your fitness and wealth, to your skills and relationships.
Lucky for us, we don’t need to understand the mathematics of compounding for it to work. We just need to remember that it requires us to persist through the agonizing slowness of those early efforts when nothing seems to be happening. Expect pain and boredom before the curve goes vertical.
Sustained incremental progress (the tortoise) usually outperforms large, drastic, often too-late bursts (the hare).
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
~Albert Einstein
“Understanding both the power of compound return and the difficulty getting it is the heart and soul of understanding a lot of things.”
~Charlie Munger, Poor Charlie’s Almanac (Book)
