In life, time can be your greatest asset or your worst liability. It just depends whether you have enough of it or not. Most people and I included at times, just aren’t patient enough to reap the rewards of patience. Everything has to be fast. Everything has to be now. The desire for instant satisfaction is rampant in modern society.
But what happens when you give something time. When you make smart, small decisions and then let them run for a month, a year, a decade or five decades?
They compound. The power of compounding is ultimate success lever that many choose to ignore. And you know what’s the best about things that compound, it takes very little work to manage – making them an almost passive stream of good that you can benefit from.
Warren Buffett, who is the most successful investor of our time, also happens to be one of the oldest investors of all time. Here is what he had to say about how he acquired his fortune.
“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”
You can’t control the first two but you’d be a fool to ignore the third. And the magic of compounding works in a lot more places than just money.
The best way to get in shape is to start at a young age and then maintain it over a long period of time. But even if you didn’t start at a young age, the best time to start is always today. A lifelong habit of unhealthy food and no exercise will likely result in a retirement plagued with sickness. The opposite rings true as well. You can’t change your health overnight. But you can make smart decisions today, and tomorrow and then the day after that and then let them compound. The minute you start putting even small healthy habits into play is the minute you get to start benefitting from the magic of compounding.
Early on in my career I intentionally chose an unpaid internship with a world-class ad agency in a big city over a full-time well paid entry-level position with a smaller town employer where I felt like I would learn less. I was able to do that because I bartered for rent, had no car, no phone and literally ate rice and beans for most meals. Since then, I have only worked directly for the Presidents and CEOs of organizations, which has greatly amplified not only my career trajectory but also my earning potential. Compounding isn’t just relevant when it comes to money but also applies to knowledge and learning. Acquire knowledge early on in your career, nurture it, let it compound and the impact will only become more significant over time. This doesn’t mean you have to move to a big city, work for free and eat beans, but maybe start by reading some great and highly relevant books pertaining to the field you want to grow in.
IdeaMensch is probably the side project I am most known for. It makes a few thousand bucks of profit every month, without me doing any of the work. It’s the best kind of income – passive income. It makes money while I sleep. And honestly, it hasn’t been hard to grow. But it has taken time. For the past ten years, I have invested a half a dozen hours every week. More earlier, fewer later. Initially, there were no profits or revenues for that matter. Then I started making a bit of money, then more. Every dollar earned always went back into IdeaMensch, building processes that ultimately would reduce the amount of time I spent managing it while maximizing IdeaMensch’s growth. By building IdeaMensch over such a long period of time, I never had to endure the existential angst that many entrepreneurs go through. It was a good idea ten years ago that I gave the chance to compound over time. Assuming I keep making small smart decisions to allow IdeaMensch to compound, then I don’t see why ten years from now that monthly profit shouldn’t be upward of ten thousand dollars.
I could have called this section “Your Network” but the reality is that the people one might consider to be a super valuable part of my network are also some of my best friends. While I don’t want to tie friendships to financial gains, I am fortunate enough that at this point of my career (I am 36), all my “employment” income comes from working with some of my best friends. It’s an incredible gift to do what you’re passionate about, earn a good income from it and do so with some of your best friends. I went to high school and college with Jesse and Jesse (the founder) at GeniusLink, where I am the CMO. Many of my best friends, friends who I’ve known well before any of us ever had a lick of success, now run very sucessful companies. Ryan runs Marmoset. Marc runs A Hundred Years. Owen runs The Cycling House. Chris runs Corbin Brands. There are many others. When I came to America, I started making good friends. Friends who not only were fun to hang out with but were also good people with a drive to get better. We have been able to hold on and grow those friendships over the past couple of decades. No matter what happens, I know that ten, twenty and thirty years from now the potential impact of those friendships will be even more powerful. Why? Because the positive actions all of us take in life will continue to compound in our favor.
Ps. My guess is the same can be said for romantic relationships, but I am the wrong person to be giving advice on that at this point in my life. Ask me in thirty years.
This is probably the one area where the impact of compounding is the most studied. There is one example that stands out. Take two individuals. One saves $10,000 per year, from age 20 to 30. Then they stop saving until they retire at age 65. The other individual doesn’t save in their twenties but starts saving at age 30 and then invests $10,000 per year from age 30 to age 65.
At age 65, who has more money? The first person, even though they only put money aside for ten years. Why? Because of how money compounds and can work for you. That’s why the rich keep getting richer. They have assets that work for them, while they sleep. And they have the time (sometimes generations) to let those assets go to work. The more time you have, the better it is. So, start investing early and then let time work for you. Be aggressive because you have lots of time to make it up.
In my early days, one can say that I was overly frugal. I have always been hell-bent on saving half of what I made. When I was a little boy, I saved half of my allowance. I only took half of my “vacation money” my grandparents and parents gave me with me on vacation. The other half went into my savings account. Selling condoms on a school bus. Same. Confirmation money. 100% into a mutual fund. Working summers in a factory. Same. By the time I was 16, I had saved 15,000 Deutsche Mark. As luck would have it, I invested that money into a tech mutual fund when I came to America. It was 1997, so the money more than doubled in a year. When I started working in advertising in LA, I made $35k a year and saved half. I slept in a sleeping bag on a used mattress. My furniture was all milk crates and I didn’t have a car so I rode a bike along some seriously sketchy Los Angeles boulevards.
But I always saved at least half. Still, do. Always will.
Now, I’ve had relatively little time to allow money to compound, since I am still only 36. But if I really wanted to, I could retire right now. Between my investments and passive incomes like IdeaMensch, it wouldn’t be a jet-setting retirement but I’d be comfortable for the rest of my life. I won’t do that because, well, I love what I do. And who knows, maybe someday I’ll start a family. Or maybe I just wait for another five to ten years and then given the power of compounding, I could have twice the assets to go to work for me.
Either way, the ball is in my court. Why? Because of a combination of growing up in Europe, getting to work in America, some decent decisions, and compound interest.
Make smart, small decisions and then let them compound.
Key Lessons I Learned and Wanted To Share
- Do the right thing over an extended period of time and the future impact of those positive actions will have the chance to compound. The benefit to you could be significant, with significantly less work in the future.
- Do the wrong thing over an extended period of time and you won’t be able to benefit from compounding.
- Make healthy choices now. Eat healthily. Commute by bike or foot. Make the time to exercise. Let those choices compound over a long period of time.
- Choose your friends wisely. You’re the average of the five people you spend the most time with. Surround yourself with smart, kind, interesting people who want to grow in life.
- Start a business as a side project. Pick a topic that interests you and build a little side project around it. Don’t worry about making money today or this year. That’s what your job is for. Look at your income and set yourself the goal of having your side project replace that income ten years from now.
- Save as much as you can, early. Today is always better than tomorrow, no matter how old you are. Putting aside money now allows you to earn a higher rate of return (by choosing more aggressive investments) and to ultimately save for a shorter period of time thanks to the power of compounding.
- Whatever you want to get better at. Start small but start now. Then let time be on your side.