UNLEASHING THE POWER OF COMPOUNDING
By Eddie Hedges
Suppose someone came to you and offered to hire you to work for them for thirty months. They offered you a choice of compensation.
First, they offered to pay you $500,000 at the end of this thirty month period. Nice salary and I think that is something on which we all can agree. Or they offered to pay you monthly with your first month’s compensation being one cent. The next month your salary would double to two cents, then double the next month to four cents, with each month’s salary doubling monthly during the thirty month period. Which method of compensation would you choose?
If you chose the second compensation package, your salary for the thirtieth month would be $5,368,709.12.
I realize this is not realistic; however, I am trying to make a point of how important the concept of compounding can be in many areas of your life, as well as your personal financial position.
Many people do not understand the concept of compounding. It is a term mostly used in financial circles. A majority of Economists believe the power of compounding is the most powerful force in building wealth.
Basically, compounding is taking the earnings from an investment and re-investing the earnings, along with the principle investment so you can make even more money. In other words, it is earnings on earnings. A simple illustration would be if you invested $1,000 at 10% for one year you would earn $100. If you then added the $100 earnings to the original principle of $1,000, the new principle balance would be $1,100. That amount invested at 10% for one year would then earn $110. Continuing the process, you would now have $1,210 to invest, whereas if you spent the earnings each year, you would have only the original $1,000 to invest. Money invested at 10% per annum and compounded annually will actually double itself in approximately 7.5 years. So, using the illustration above, you would have approximately $2,000 at the end of 7.5 years.
Something that is important to remember in compounding is that it starts very slowly, but over time it will explode. If you will analyze my example of working for thirty months, you will see what I am saying. Do the math for yourself and you will see the impact.
But how do you unleash the power of compounding in your life? I think it is important to emphasize that compounding can be used in many areas of your life and for many beneficial and useful purposes.
First, I want to look at reaping what we sow. What seeds are you sowing and what do you want to harvest? Maybe the question should be “What is the legacy that you want to leave”?
Let me take you into the future. You are attending a funeral, but it is your own. You are there in spirit and no one knows you are there. What do you want said about you? How do you want to be eulogized? Do you want to be remembered as a good spouse and parent, a good provider for your family, and a generous, caring person? Will the preacher’s job be easy or difficult to say nice and comforting words about you? Will he say your integrity was without question and that you loved the Lord and served Him faithfully? The way you want to be remembered after you are gone is how you should live your life while you are on this earth. John Maxwell, famous leadership expert says “An inheritance is something you leave to someone. But the legacy you leave is something you leave in someone.” What are you leaving in your family or the people that you come in contact with throughout your life? Will the legacy you leave continue to compound after your death? Are you planting seeds that will grow, reproduce, and compound when you are no longer on this earth? I call this “perpetual compounding” because it continues on indefinitely.
Let me give you a Biblical illustration of not taking proper care of the seeds you plant. Proverbs 24:30-34 NIV, “I went past the field of the sluggard, past the vineyard of the man who lacks judgment; thorns had come up everywhere, the ground was covered with weeds, and the stone wall was in ruins. I applied my heart to what I observed and learned a lesson from what I saw: A little sleep, a little slumber, little folding of the hands to rest—and poverty will come on you like a bandit and scarcity like an armed man.” When you plant the seeds, you then have the responsibility to properly care for the crop and eventually produce a bountiful harvest. So we not only reap what we sow, but we have a responsibility to cultivate and nourish the crop to harvest. Think how this applies to the lives you touch throughout your lifetime! Plant seeds that produce greatness, then provide the proper care, mentoring, and guidance to bring about the desired results.
Another Biblical example of compounding comes from John 15:1-8 NIV, “I am the true vine, and my Father is the gardener. He cuts off every branch in me that bears no fruit, while every branch that does bear fruit, he prunes, so that it will be even more fruitful. You are already clean because of the word I have spoken to you. Remain in me, and I will remain in you. No branch can bear fruit by itself; it must remain in the vine. Neither can you bear fruit unless you remain in me. I am the vine; you are the branches. If a man remains in me and I in him, he will bear much fruit; apart from me you can do nothing. If anyone does not remain in me, he is like a branch that is thrown away and withers; such branches are picked up, thrown into the fire and burned. If you remain in me and my words remain in you, ask whatever you wish, and it will be given you. This is to my Father’s glory, that you bear much fruit, showing yourselves to be my disciples.”
As God’s children, we are to bear fruit for His kingdom. But did you notice the compounding effect from this passage of Scripture? Verse 2 says we are to bear fruit because we abide in Jesus. The verse then states that we are to bear more fruit. Finally, in verses 5 and 8 we are told to bear much fruit. So, the compounding effect of our ministry in God’s work is to bear fruit, more fruit, and much fruit.
Go back to the illustration earlier about working for someone for 30 months and the power of compounding. Think of the impact that could have on sharing the Gospel of Jesus if you witnessed to just one person a month and continued to do so. What if that person also started to witness to one person per month? As the process continues, look at the number of lives that would be touched over a 30 month period. And that is only the beginning.
If you are a business person, consider how you can unleash the power of compounding in building your business. It has been said that word of mouth is the best advertising any business can get. That is compounding your business. One person says good things about your business, then another, and eventually you will have many, many people telling your business story. A word of caution here. When I was in banking, I told our staff—you can save (or charge) $25.00 and it will cost you $2,000.00 in bad publicity. This would be negative compounding for your business.
Look at the importance of compounding yourself. If you are a business owner, Manager, CEO, etc., you are charged with the responsibility to run the company to the best of your ability. You often know things about the company that other staff members do not know. By training qualified staff members to be Leaders and they will in turn train more Leaders, your organization will become much stronger. I do not believe you lose anything by making another person stronger and helping them improve. Plus, your company will be in a much better position if it is ever necessary for you to be gone for an extended period of time. Again quoting John Maxwell, “Your candle loses nothing by lighting another.” I believe this certainly applies when training Leaders. Have you ever been to a Candle Lighting Ceremony? The first candle is lit and then it lights another and those two light two additional candles and the process continues until all the candles are shining their light? Just think of the number of other candles you can light and compound during your lifetime.
So often, business’ and organizations become discouraged if they have had limited success after only a short period of time from the beginning of a new product, service, or procedure. They start off with dreams of greatness, but when there is no immediate success, they stop trying and give up. They never give the power of compounding the chance to make their organization a success. I have been told by Small Business experts that it normally takes a new business start-up two years before it turns a profit. In my own experience, it often took two years before I could see significant results in the new programs I implemented.
When do you stop learning? An equally good question is—when do you start learning? Education and learning are a lifelong process. It begins at birth and should end at death. Our education system is built on the compounding principle. It progresses from Elementary to Middle to High School, then for some College or Trade School, and possible Graduate School. But that is not the end. Most professions require Continuing Education. Employers are constantly training and re-training employees.
We are constantly presented with new devices that require us to learn how to use them. Life is about learning and growing. We are not supposed to stay in Elementary School all of our life. Much of our learning experience is built off of things we have previously learned. The power of compounding enhances our education.
I personally believe society needs more of a hunger for learning. If you look at many of the successful people you know, they are constantly studying and searching for new and better ways. Each day is a new opportunity to learn something new. I suggest that you read, study, and research constantly and continually. Read motivational books, literature on leadership, morality, ethics, trade journals, and the Bible. Something that I encourage you to do is to daily read the Chapter of Proverbs that corresponds with the day of the month. There is a wealth of information on life application issues found in Proverbs. It is all beneficial for compounding your learning and education. And it should be practiced throughout your lifetime.
OTHER COMPOUNDING THOUGHTS
Briefly, some additional areas where compounding can be beneficial are Civic and Charitable Organizations. Also, Social Media Sites are very useful in compounding. Businesses love for you to “like” their page or accept them as a “friend”.
Finally, let me give you another illustration of the power of compounding in an area which you probably never considered, learning to play a musical instrument. It starts taking small steps and learning the basics. You practice what you were taught during your weekly lessons with your teacher and each week you learned something new. But you built on what you were previously taught. Over time, through learning new skills and practicing daily you developed the ability to play the musical instrument. What would happen to your skills if you quit practicing and taking lessons? Your skills at best would plateau and would probably diminish. The power of compounding and developing your ability to play the instrument would stop.
You have heard the statement, “Success breeds success.” What this means is that once you have learned the principles of how to be successful and you know those principles of success, you will apply them again and again in new projects or opportunities. Compounding and the power of compounding can be put to work for you whether it is in the area of finance, selling products or services, or building your customer base. More importantly, compounding works in all areas of your life, such as building relationships, improving your health, learning and education, career, and personal development, such as learning to play a musical instrument, as mentioned above. You start building a foundation slowly and gradually build on the foundation. You will find that over a period of constant application the compounding will start to build and quickly explode. At first you will not see the results because they are small and not noticeable. Look back at the example of the job offer I gave earlier to see what I mean. But, the principle of compounding will only work if you do.
So what is compounding. It is taking those things of value and teaching or duplicating them in the lives of others. And hopefully, they will teach those things of value and the process will continue on indefinitely, perpetual compounding, as I stated earlier. I believe that everything in which you are associated should be better because you were a part. This applies to family, relationships, work, church, or any other activity. Did you make a difference because of your involvement? Did you compound your life for the benefit of others?
Proverbs 11:24-25 NIV, “One man gives freely, yet gains even more; another withholds unduly, but comes to poverty. A generous man will prosper; he who refreshes others will himself be refreshed.”
Eddie Hedges is the author of THE HEART OF FINANCIAL MATTERS, SEEKING A SERVANT’S HEART. EBooks available for $0.99 at iuniverse.com. For additional information and articles from the author, please go to www.theheartoffinancialmatters.authorxpress.com.