How Compound Interest Affects Every Part of Life
“The best investment you can make is an investment in yourself…the more you learn, the more you earn.” – Warren Buffett.
This is the second post in a series I am calling “Investing for the Long Term”. You can read the first post here.
In my last piece, I mentioned how compound interest (CI) was omnipresent in our lives. I am now going to expound on why I believe this and give some examples to prove my point.
Most of us know CI impacts our investments. You put some money in an index fund, wait 40 years, and end up with a lot more than you started with. Sacrificing spending today for gains tomorrow can be quite fruitful, at least when applied in the proper manner.
We associate CI most closely with investing because of its quantifiable nature. However, the same principle investors use to accumulate wealth can be applied to many other situations. Let’s take a look at some more qualitative examples of CI affecting our lives.
The way to look at CI and sleep is not at maximizing gains but minimizing losses. According to WebMD, chronic sleep deprivation over long periods of time increases chances of a heart attack, high blood pressure, obesity, mental impairment, and a host of other issues.
These conditions are the result of sleep deprivation compounded over a lifetime. Only miss the recommended 6-9 hours of sleep about once a month? That’s probably a manageable debt, and nothing to be concerned about. Get 4-5 hours of shut-eye every night for a twenty year period? That is when the trouble starts to brew.
It’s tough to apply CI and sleep in a positive way because the human body generally needs about 6-9 hours of sleep a night for peak energy and attentiveness (anything over that can actually start negatively affecting you). Minimizing sleep debt is the key to optimizing your sleep habits and stopping the adverse effects of CI over a long time period.
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Consistently eating healthy foods (which are not debatable, but that’s another story) are one of the best ways CI can positively impact our lives.
If you continuously feed your body and minds with nutrient-filled packs of energy, your health will improve and compound over time. Conversely, if you keep eating processed junk that adversely affects your body and mind, your health will deteriorate and compound over time.
CI also applies when trying to switch to a healthier diet. At first, it can be painful to replace that daily cookie or cake with an apple. But, over time, when the habit gets ingrained in your brain (and even your taste buds!), it becomes easier and easier to eat that apple. Then, eventually, you start craving that very apple and wonder why you ever liked cookies in the first place.
This scenario is similar to the transition from being a net consumer to a net saver. Anyone that has accomplished one and is struggling with the other should evaluate how similar these habits really are.
Like sleep, fitness is more about preventing loss then maximizing gain, at least from a longevity perspective. There is a universal and genetical limit to how fit we can become, meaning we can’t compound gains infinitely.
However, we can minimize the debts we incur in the aging process by consistently moving our body. Even if it is just walking for 30 minutes every day, we shouldn’t underestimate how important exercise is in diminishing how much CI works against us as we grow older.
Enhancing focus is comparable to compounding wealth: both are basic and easily quantifiable concepts that can have powerful implications on our lives.
Instead of compounding money over time, improving focus is literally compounding how much time we can spend on something. Through preparation, meditation, or other practices, the length our brains can fixate on a certain task can be improved and compounded on.
Sadly, CI can negatively change our ability to focus. With phones, social media, and other constant distractions that technology has wrought upon us, it is probable that most of you have to strain just to finish this article.
I referenced this in the first part of the series, but it is worth reiterating because it is such an important example. Applying CI to learning is tremendously powerful, and is how some of the great thinkers in history became so wise. It is what Warren Buffett is referring to in the quote that starts this piece, and what Bill Gates means when he talks about getting a “knowledge advantage.”
Every time you learn something, you compound this new knowledge on top of what you already know. And, as your knowledge base grows, you will be able to make even more connections and insights with each new piece of information learned, which is CI at its finest.
There’s a reason some people seem 100-times smarter than an average Joe, even though their IQ might only be 50 points above average. The wise people of every generation never stop learning, accumulating a base of knowledge that gives them exponentially more insights than the laymen.
Using CI in every part of your life is a monumentally powerful principle. It is a case of what Charlie Munger calls the “Lollapalooza Effect,” when several tendencies or habits work in concert to drive us toward a particular action. We all should try and maximize when CI works for us and minimize when it works against us.
Disclosure: The author is not a financial adviser, and may have an interest in any companies discussed.