The Power of Compounding

How Does Compounding Work?

When I was in school, there were chapters about simple and compound interests. Our teacher taught us very well about the two. The teacher first taught us about simple interest and then went through compound interest. 

This was the first time when I knew about compounding. How the interest gets added to the principal after a certain time period and then produces more amount of interest. The simple interest rather felt more conceptual because there is nothing complicated in it. I hated compound interest because I had to do a lot of calculations to arrive at the answer. I wished the compounding doesn't exist. I thought it was nothing more than just a complication.

Compounding In Real Life

During my school days, I felt that there is no practical use of compounding because I didn't know about any example of compounding in real life. I didn't even know the meaning of compounding at that time. I thought that this is just a mathematical concept that does not go beyond the book and notebook.

I saw a lot of practical examples of simple interest because my parents always used to get debts from moneylenders on simple interest. Though they used to take debts on compound interest too, it was rare.

But now when I am going to enter my 20s, I have seen a lot of examples of compounding. The concept of simple interest is limited only to taking loans from moneylenders and some from banks.

Nearly all the areas of our life work on compounding. Whether it be business, investment, health, study, or relationships, you can easily feel the role of compounding.

Whenever a company starts, the founders have to struggle a lot to get the required seed fund, manufacture the products, and make sales. The initial profits tend to be in small amounts and the company may even get into debt. It takes a lot of time, patience, and continuous hard work to get to the point where the company starts gaining profits. Once results start to appear in the form of profit, the profits start to increase drastically.

The same thing goes with each and every field of life. Initially in relationships, we hesitate a lot to communicate with our companions(it may be a new friend, spouse, or other), we don't know what to say, we can't even start the communication sometimes, the communication ends shortly. When we meet with the same person again and again regularly, we build an inner relationship with him and this comes out in the form of long conversation periods. Eventually, we build a strong relationship.

How Does Compounding Work?

Compounding does not produce results in some days or weeks or months. We have to dedicate a lot of time which may range from years to decades. But not everyone can be patient for such a long time. Most of us are not patient enough to wait for the results and work continuously. This is one of the reasons why most of us fail to achieve what we want(Sorry, I am yet not qualified to say this).

In my school days, while solving problems related to compounding, I came across interest rates like 12%, 15%, or even 20%. This, of course, can be seen in various money-related processes like investing in the stock market, taking debts from moneylenders, etc. but in other areas of life, you won't come across such a great rate of interest. Such interest rates are nearly impossible in life improvement areas.

But, the great thing is that we can see a continuous increment in the effectiveness in our life.

When we bring a small amount of improvement, it gets added to our total value and then the next improvement will be according to the new total value.

Ankur Warikoo, an entrepreneur and a mentor, says that we should not do a lot of great things at the start because this will only make us feel exhausted. Start with small things and do not quit until you see results.

On his Twitter handle, he has a background photo that is related to compounding. This picture tells us that if we improve ourselves by 1% every day, we will be 37.8 times in value as compared to what we are today in 365 days.

And if we get worsen by 1% every day, we will be of 0.03% value of what we are actually today after the next 365 days.

An Example From My Observation

Recently one of my classmates, Asha, cracked the National Eligibility cum Entrance Test(the NEET-UG) which is conducted by National Testing Agency. She did it in the first attempt and without coaching. What others see is that she studied for one year or so and cracked it but it is not so. This is, as I can see, the result of her continuous studies for 5 years.

I remember when we became classmates in 9th standard, I even didn't know her(Maybe, she was not good at studies and therefore wasn't so popular). I got acquainted with her just some days before the final exams of the 10th standard. When the results of the 10th standard were announced, she ranked 6 or 7 with good marks and that's when she started to come in sight.

So, these two years were like she was working but didn't see any major results. During the 11th standard, she became more popular because she was doing exceptionally well in her studies. She continued it in 12th standard too. I think here also she was improving her with the same rate as she was doing during the 9th standard but the results were getting compounded every single moment.

Some amount of her results were seen when she came out to be the topper of our class.

The actual results came when she cracked the NEET UG exam without any coaching and from such a village where girls are not given too much freedom to choose their careers.

This way, she studied for almost 5 years and made herself capable of being a good medico.

Other posts that you might like to read,

Become self-supporting in everyday life

Why visiting the doctor is not always the solution?

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