The Hidden Power of Compounding and How to Harness It

Ways to take advantage of this powerful and often-overlooked force for improvement

Ever wonder how successful people reach such heights? Think of a wildly successful person you admire. How did they get there?

The typical answers are hard work, innate gifts (personality, natural ability) and luck. These factors play a role, but one of the most important factor is left out: they leverage the power of compounding.

For compounding to occur, only two things are required:

You’ve probably heard of a specific type of compounding: compound interest. In this context, compounding means that growing your money by some percentage every year eventually snowballs into huge results if you give it enough time.

For example, say you are able to earn 7% per year on your money. That doesn’t sound like a lot: if you invest $1000, that’s $70 in a year. It seems pretty modest.

Yes, you’ll earn $70 in year one, but in year 2 you earn $70 (7% of $1000) plus 7% on the $70 of additional money in your account that grew from year 1. As time passes, that 7% per year pumps out bigger and bigger piles of cash:

One lesson from this exercise is to save and invest some of your money. Your future self will thank you.

Another lesson is the earlier you start, the better. More years means more opportunity for exponential growth.

But there’s an interesting corollary to this exercise that is less obvious, and much more exciting: compounding isn’t just something that happens to your bank account — it applies to many other areas of life.

Related posts:

I picked up interest in TypeScript a while ago and started playing around with it on a personal project. A few months later, my engineering team at work started adopting TypeScript as the language of…

Startups are constantly being formed at a rapid rate. Today, I’m going to share 3 startups formed recently and what they do. “DecorMatters is an Augmented Reality (AR) app that redefines how you buy…

Choosing a new home can be an exciting yet challenging process, whether you are a first-time home buyer or a seasoned investor. From the location to the price, there is a lot to look for while…