Any action, compounded over time, will produced incredible results. Interest, compounded over time, will produce growth. in a number, such as savings, inflation or a stock price when you reinvest dividends.
In nature, there is continuous growth. In finance and other typical measures, interest compounds at a fixed rate – yearly, monthly or daily. In data science, this is called discrete compound interest.
There are complex formulas already established to calculate the great power of compound interest and efforts, but all you really need to understand are the concepts.
The Power of Compound Interest Rates
These are standard compound interest rates used in finance. Us humans need to run our lives, on a schedule. So, we created “interest rates“, or time intervals at which interest is compounded. As you make payments with any loan, the amount you pay in interest goes down, and the amount paid towards principal goes up.
When the interest rates are for savings, bonds or other financial instrument, the interest compounds in the asset holders favor. Think of it this way, if you owe money at that has compound interest, someone also is getting paid that compound interest on the other side.
Mortgages are compounded monthly, credit cards and other revolving debt are typically compounded daily. These compound interest rates are an APR (annual percentage rate) divided by the frequency of compounding – Daily or monthly.
Compound Interest with Credit Cards
Example – 18% APR compounded daily is 18% divided by 365 days, or .0493% a day. On day one you have a balance of $1000 + .0493% = $1000.49, the next day $1000.49 + .0493% = $1000.98. On Day 3, Your balance is $1001.47, Day 4 $1001.97 – going from 49 cents a day in interest days 1-3, then to 50 cents a day on day 4.
That is a 2% increase of the interest paid every 4 days! And that continues to compound. That’s why, if you’re paying interest, it’s important to make your payment as soon as you can. Some quick math is that it would be 51 cents on day 8, 52 cents a day in interest on day 12 and so on.
The frequency, or rate, that interest compounds greatly affects it’s growth. credit card companies compound their interest rates daily to maximize their profits.
The Power of Compound Efforts
The 1% Rule has been around for quite some time. It is impossible to live up to for long, rather a catchy concept to help you optimize your life and business. While you can’t make your life better by 1 percent everyday, you should always aim to consistently improve it. This is the power of compound efforts.
By compounding your efforts each day, such as continually doing more pushups, or trying to get mundane tasks done quicker and easier, you can accomplish more each day and have more free time.
Consistently working more productively will allow you to progress in your career quicker. Making more sales calls will help you grow your business.
The residual effects of a better career and larger business will free up a lot of physical and mental energy to enjoy life more. It will also help slow down the other side of compounded efforts –
The Power of Compound Decay
Ashes to Ashes, Dust to Dust – everything in this world has to deal with the law of Entropy. Things goo from order to dis order, except when it seems they are growing. Life magically fights this at first, but eventually suffers the wrath of compounding decay.
A baby is born and grows continuously mostly healthy cells and also bad cells (cancer). As we age, our body stops growing taller, the rate of healthy cell creation slows, and unhealthy cells continues to compound. With less healthy cells to destroy the unhealthy cells, humans, and all life sees the unfortunate power of compound decay.
The good news is that anyone can greatly slow this inevitability by continuing to grow as long as possible. Never retire. Keep learning, exercising, speaking to others. build relationships, community and skills. Create things to share with others, and listen to and help them.
The Internet is Compound Interest and Decay
Everything in this world is compound interest and decay. The balance of good and evil. Each post on this blog has the effect of compound interest. At the same time, more people are posting to the internet about personal finance, and so, each one of my posts decays.
You can also look at it like inflation. There is more content so the value of each piece of content becomes less valuable. There are other factors, but it is a simple way to look at it.
Again, how can we continue to grow?