Compound interest is the single most important concept in finance. Time value of money, as an idea, comes close. But, understand compound interest and it will change the way you think about saving money for the future.
The simple notion behind compound interest is that you earn interest on your interest. This means small amounts invested today that get compounded over time earn a lot more in the long run than large amounts compounded less. It is powerful stuff.
I would like to make the argument that learning works in exactly the same way.
Let’s imagine you come to me and say: “Hey, I’m going to read a non-fiction book for 10 minutes every day on an interesting subject.”
Do we expect a difference between your understanding of the world and mine tomorrow? Probably not.
Day after? Again, probably not.
But, what about a year from now? Sure, there is likely to be a difference thanks to the accumulated knowledge of 3650 minutes of reading.
What about 10 years from now? Now, there is sure to be a difference. You have clocked 36,500 minutes of reading.
Then, what about 30 years?
Little actions carried out consistently over time can have tremendous power.
You and I know that. But, learning is a different monster.
In that first year, you probably just accumulated a vast amount of knowledge.
But, fast forward a few years and that knowledge soon becomes understanding.
As you read an interesting mix of topics, you soon begin to realise that science, art, management, psychology, leadership, self-help all become interrelated. You begin to see patterns and links. It is a deep understanding of these links that gives us wisdom.
Wisdom is simply an extension of that understanding, it is knowing what to do with all this knowledge in the context of daily life.
And, we know that it is one thing to be knowledgeable but it is quite another to be wise.
This is why we see a tremendous difference between people’s wealth, success, happiness and energy as they age. For most of the population, education ends when they finish schooling. But, for people who take it upon themselves to learn with greater vigor once formal learning is complete, the effect of their learning over time compounds.
Put it simply, if Jeff Bezos or Bill Gates read an interesting book on human behavior right now, they would get a LOT more value out of it than you and I. That is because they have so many interesting mental models that allow them to test findings and incorporate learnings.
It is these mental models that differentiates masters/learning machines and everyone else.
Every single day, we have a choice, both with money and with learning, to use the power of compounding or not. Not being aware of the choice is not an excuse. And, not choosing is, really, choosing…
As the great Albert Einstein once said:
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”