The power of compounding

“Our trouble is not ignorance, but inaction.”

 – Dale Carnegie

The power of exponential growth is undeniable. It is the foundation upon which finance is build upon but it can also be grasped to improve your life, one step at a time. What actions can be performed today to harness the potential of it?

The Butterfly Effect

In an earlier post on this site I have written about how I believe life is intrinsically deterministic. Action leads to result. A concept worth exploring with regards to determinism is the so-called Butterfly Effect. The Butterfly Effect is an example of Chaos Theory, which is a branch of mathematics that is focused on systems that are highly sensitive to starting conditions. In short, it can be summarized as follows:

When the present determines the future, but the approximate present does not approximately determine the future.

Chaotic systems are notoriously hard to predict and this is the reason why weather reports so often fail to predict a torrent of rain when you plan to go to the beach with your family. The Butterfly Effect is a famous example of such an interaction, where the flapping of the wings of a butterfly can have a significant effect on the location and path of a tornado rampaging the countryside weeks later.

What can be learned from Chaos Theory?

Our lives are a chaotic system and life cannot be predicted with accuracy (If you find a way, give me a call, we’ll be rich!). What can be learned from this theory, however, is that a small change in the present can have extraordinary results in the future. Although by no means can an expected result be forged beforehand, it is the reason a janitor saving 50 dollar a month can become a millionaire. A small action today can lead to an avalanche of changes for your future. Just look out into the world and you can see the rich get richer and the successful string success after success together.

No one starts life with achievement. Achievement is gained one step at a time, failure after failure. Habits need to be formed that in turn will lead to results. Each change in life that is crafted now will be the foundation for the next. Over time, this means that doors open that were closed before and opportunities can be taken that were out of reach in an earlier stage.

The problem with this compounding effect is that it starts off slow – the beginnings of the avalanche are barely noticeable – and it is hard to stay motivated for the goal you are trying to achieve. I believe there is an issue with the implicit assumption behind this motivation. Remind the short summarized sentence about Chaos Theory at the start of this post? The future can not be determined, not even approximately. What you can be certain about, is that certain behavior will most likely result in a positive change in your life, whatever the change may be. When starting a project, it may fail horribly but teach you valuable lessons for the future. In fact, inaction in general will often not have a positive impact on your life at all.

Mistakes of omission

I believe the mistakes that have the most impact in your life are mistakes of omission. These are the opportunities that you could have created for yourself but failed to act upon. Let’s say you were lucky enough to be born in a wealthy, western country with a democratic system and plenty of freedom. You had nice parents, went to a great school and ended up with a useful diploma. So far so good. You start working for a good international company and spent your years living an average life. Then, suddenly, at 45 years old, you observe your old high-school friends leading fantastical lives and retiring early on their savings. You are consumed with envy and become unhappy as a result.

In this scenario, the person had every opportunity you can think of in life to retire early at 45 years old but failed to seize them. He had a relatively carefree life and a great foundation to build upon and still – due inaction – he did not achieve enough to be happy. Inaction can have a huge opportunity cost and it is worthwhile to foresee this cost.

Creating a feedback loop

The compounding effect seem to work in both opposite directions: positive or negative. In the positive direction one can form habits, create foundations, build upon them and create a positive feedback loop in their life that will lead to exponential growth. There is however, also a negative side to life and everyone will – at some point – experience great tragedy in life. This too, can lead to exponential change in your life. There are plenty of stories to be discovered about people who react in a non-productive way to tragedy; One might experience the heartbreaking event of losing his/her spouse early in life and turn to addiction to hide their feelings; In turn, they lose contact with their children – leading to social isolation – which in turn feeds their addiction. The end of this story is often not pretty. They have compounded their life in the polar direction due to a negative feedback loop.

So if you want to propel your life into a positive feedback loop and use the compounding effect to your benefit you need to make changes today, regardless if the change is big or small. Your original goal might not be reached, because you cannot predict which way your life will go, but you will create a foundation that all future changes can build upon, slowly moving you forward towards your aspirations.

Make a change now

So practically, what are changes you can make today? I suggest observing the natural masters of the compounding effect and learn from them, here are some things to get started:

  • You can create a process for yourself to add regular additions to your goal. A schedule is very helpful in this, just reserve time every Saturday or even every day to create a state of focus for yourself
  • You can optimize the work you are doing and making sure whatever work you are doing is efficient. Removing any inefficiency in whatever you are doing will improve all future work done on your project. This is a great foundation for the compounding effect.
  • You can eliminate waste from your life. You need free time to create the tsunami of change in your life. Remove any distractions that are not moving you towards achievement. Consuming TV and/or internet memes all day is probably not creating a positive feedback loop in your life. Just the action of removing 1 hour a week of TV watching and putting the energy in working towards your goal can start the feedback loop.

What are changes you made to your life that now result in exponential results? I would love to hear some stories in the comments below.

3 thoughts on “The power of compounding

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