The Compound Effect

“We are what we repeatedly do. Excellence, then, is not an act, but a habit.”- Aristotle

Time Value of Money & Your Personal Life

Congratulations! You won a $10,000 prize in the lottery! As you approach to receive your prize, the cashier gives you the following options:


Option1- Recieve the entire prize now

Option 2- Recieve $10,000 in three years


We (or any rational toddler) would instinctively choose the first option 99% of the time - but why? The time value of money can help us understand that.


This basic financial concept draws from the idea of the capital's earning capacity with investments and interest rates. Even though the final theoretical value would be the same, $10,000 ≠ $10,000 in three years. At an annual interest rate of, let's say, 4.5%, the first option would yield you a future value of $11,411.66.

Now, why don't we apply this seemingly trivial principle outside of the mathematical context? How does it apply to our daily lives?

The Twins

“You will never change your life until you change something you do daily. The secret of your success is found in your daily routine.” -Darren H

Just like compounding money, each decision you make has a ripple effect. Although it may not seem as obvious at first, small choices and actions made regularly lead to big outcomes - both good and bad.


Let’s meet two identical twins: Scott and Brad


Scott makes some small, positive changes daily e.g. reading 10 pages, replacing soda with water, exercising 3x/week.

Brad makes a few poor choices e.g. binge-watching shows for hours on end, drinking daily, and never exercising.


At month 10, there are no perceivable differences. By month 25, measurable differences can be seen and by month 36, the differences quickly become stark. Scott loses 33.5lbs, gets the internship of his dreams and his relationships are thriving. Brad, on the other hand, puts on 33.5lbs (weighing 67lbs more than Scott). He has been feeling sluggish and less confident about himself, became less productive at college, and more withdrawn from his relations, leading to an overall unhappy state.


Every choice generates behavior, which eventually forms habits that reinforce our future choices. Use the future-value perspective for all areas of your life.


Now that we have established the immense power of compounding on our lives, how can we harness its power to our advantage?


The Pleasure Principle & Instant Gratification

“You alone are responsible for what you do, don’t do, or how you respond to what’s done to you.” -Darren Hardy

Humans are hardwired to want things -- now. It’s called instant gratification, and it’s a powerful force. Instant gratification is the desire to experience pleasure or fulfillment without delay or deferment. Waiting is hard, and there is an innate desire to have what we want when we want it.


In the Freudian psychological model, humans are believed to act upon the “pleasure principle.”


The pleasure principle is basically the driving force that compels human beings to gratify their needs, wants, and urges. When we don’t get fulfillment, our psychological response is anxiety or tension, which can derail a vicious cycle of unwanted actions to "compensate" for the stress. This exceptionally toxic, and detrimental to our long-term goals.


Saying no to immediate gratification is no easy task. If it was, we would all be trim, healthy, and have a reasonable amount of money in our savings account. However, there are a couple of strategies for reversing this vicious cycle.


Break down big goals into small, manageable chunks. Breaking big goals into smaller pieces with rewards after each step (such as a great night out or a triple chocolate milkshake) makes you more committed and more likely to make the best decisions in the long-run.


Create S.M.A.R.T goals. Peter Drucker, considered to be the father of modern Management came up with this concept when writing his best-selling book Concept of the Corporation (1946). In his studies, Drucker found that SMART is an effective tool that provides clarity, focus, and motivation managers and employees needed to achieve their personal and laborious goals. This acronym stands for:


Specific

Measurable

Achievable

Relevant

Time-bound


Habit Tracker (Notion App). At first, the idea of tracking my daily habits seemed silly and counterproductive, but after a couple of weeks of consistent habit-tracking, I have never felt so fulfilled with my personal progress. As a Finance major and Excel nerd, the idea of having a spreadsheet where I could daily track my "small steps" really appealed to me after I read The Compounding Effect. The Notion app is an intuitive and versatile app I have been using to facilitate my smart goals.


Bonus: Tim Urban's Ted Talk: Inside The Mind of a Master Procrastinator

"In this hilarious and insightful talk, Urban takes us on a journey through YouTube binges, Wikipedia rabbit holes, and bouts of staring out the window -- and encourages us to think harder about what we're really procrastinating on before we run out of time."

https://www.ted.com/talks/tim_urban_inside_the_mind_of_a_master_procrastinator



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