In an era when so many people want to have the next big shot when everyone wants to come out with the next big thing and suddenly find themselves at the top, this book, The Compound Effect by Darren Hardy has a very important message. Success comes from small actions, small but consistent and repeated actions.
People who emphasize the importance of early savings talk a lot about compound interests. Let’s take an example. I don’t remember where I read it, so I made the calculations myself. Anyway, this is quite useful to make sure that what you think is like that.
Let’s take an average yearly return on investment of 6 per cent. I remember that originally 8 per cent was taken. Anyway, the average return of the stock market in the long run (we talk about decades) is somewhere between 7 and 11% (nominal). Let’s be more pessimistic and take 6 %.
Alice will start putting 5k$ a year early on. Not that much early, but at the age of 30. Only 5k$ a year. She will do this for 15 years, then she just doesn’t touch that money anymore until she turns 60. At that point, she’ll have almost 290kY on her account.
Bob, on the other hand, will not put money away until the age 45. But at that point, he will start investing 10k a year. He will start investing when Alice stopped doing that. When he turns 60 he will have around 270k$.
That’s the power of the compound effect. Even though Bob invested with the same ROI and for the same amount of time, twice as much money, yet he ends up with less, because he started later.
The sooner you start building your capital the more you’ll end up with. And it’s very difficult to close-up on advantages made from early investments. We are not talking only about financial capital. It’s also true for the - more important - intellectual capital.
The main idea of Darren Hardy is that you should make very small steps towards your desired destination, steps that you measure ensuring that you actually do make steps in that direction. According to the law of compound interests, your small investments in yourself will have an enormous effect on your life.
I’d like to finish with two examples. As Joe Armstrong, the inventor of Erlang shared in his interview with Peter Siebel at Coders at Work, once Richard Hamming said, “I always spend a day a week learning new stuff. That means I spend 20 percent more of my time than my colleagues learning new stuff. Now 20 percent at compound interest means that after four and a half years I will know twice as much as them. And because of compound interest, this 20 percent extra, one day a week, after five years I will know three times as much,” or whatever the figures are.
The other one is a bit more dramatic. Think about an aeroplane that misses its route only by two degrees. Fast enough, you’ll be off the course by tens of kilometres from the desired destination. In 1979, 257 people died because of that. This also shows the importance of small checks and corrections. This book can help you implement them in your life!