Life is all about Compound Interest
Principle (1 + Interest Rate Decimal) Power of Time (years) = Compound Amount
£100,000 x (1.05)5 = £127,628.17
Compound interest is something that comes up in our conversations with clients quite regularly.
Simply, if you invest £100,000 and get a 5% return in year 1, you now have £105,000 as above. If you then keep that money invested for year 2 and also get 5%, well you now have £110,250. 10 years of that annual return - which is punchy folks and let me just manage your expectations RIGHT there and tell you that if someone ever offers you this guaranteed for 10 years, they’re lying - is £162,889 and so on.
Similarly if you invested £100,000 upfront and added £10,000 per annum to the magical world of 5% per annum guaranteed, then you compound this to have just over £292,000 in 10 years time.
So compound interest is powerful stuff and should be seen as your long term friend.
But that is my point, it is only a long term friend. In the short term, it seems like a small win and as homo-sapiens rocking the 21st century, we want stuff and we want it NOW.
I have recently been listening to and studying an amazing guy called Naval Ravikant, or better known as The Angel Philosopher. He preaches that we should not be thinking in a short term manner, ever. Small marginal gains, or compound interest, should be built upon over time.
He quotes “All the benefits in life come from compound interest. Be that money, love, relationships, health, activities or habits.”
I love this. It’s bang on. Look…
- You rarely get more money overnight. Lottery winning isn’t something you can hope for. Plus, there are loads of stories of lottery winners blowing their fortune in no time at all. This is the opposite of compound interest, called simple interest where the number only decompounds over time. Not much has ever been achieved by decompounding, has it.
- If you fall in love too quick, it is usually a recipe for disaster and behaviours push the thing you love away.
- We’ve all had mates - or been guilty ourselves - who have fallen straight into a relationship so quickly they’re at the back end of it before it’s even begun.
- Anyone got super fit and healthy after working out once in the gym? Nah, didn’t think so. It takes time to get a super hot bod (or forever in my case).
- I guess you can fall into activities or habits quickly, but you don’t get good at them or make them stick until time has been invested and you don’t expect instant results.
If you look to incrementally improve yourself in each of these areas, day by day, in a decade’s time you can be 100 times improved. I know this because I’ve seen it happen to money. It can happen to everything and anything you want to improve in your life, over time.
Now I just need to convince my wonderful fiance to let me watch more and more football at an increasing compounding level for the benefit of my future self. Yeah. Good luck.
Alfie Mullan, November 2018