Compounding January 2013

I’ve been reading a bit about savings strategies, investments, and retirement lately, and I find the same advice everywhere: take advantage of compounding as much as humanly possible. Every dollar you save now will be worth x number of dollars in x number of years, etc. This is solid advice and a great thing to keep in mind. It would be a folly to spend $20 now without being aware of what it would be worth in 10, 20, or 30 years had you invested it.

That said, there is another view that investors and personal finance advisors will never show you. This is the more balanced perspective, that everything compounds – not just money.

Let’s say you are 24 years old and want to retire by age 50. You’re tempted to take a year off from working to see the world, but your financial advisor reminds you that this would set your retirement goal off by two years because you would burn a year of savings and forego a year that you could be saving. You give in and delay your round-the-world tour until you are 50. I hope you don’t get hit by a bus before you turn 50.

Now let’s back up and imagine you had a life advisor who was aware of a more balanced perspective. She valued money and urged you to get good at saving, but she also realized that money was not the only compounding asset you could acquire. Instead of convincing you to keep working until you turned 50, she convinced you to take that round-the-world trip when you were 24. You took the trip, had one of the most amazing years of your life – full of lessons, memories, and friendships. During that year, your view of the world changed, as did your personality, and entire approach to life. You came back refreshed and full of new ideas, motivation, and connections. Instead of going back into the workforce and immediately resuming your desk job, you felt you could better put to use your newfound motivation by starting your own company. Leveraging the new perspective of the world you gained during that year, you successfully launched the company. Five years later, you sold the company for $10 million and retired at age 34.

So, this might sound too good to be true, but it happens all the time. It’s never this simple, and not always on this scale, but it happens. The relationships, maturity, wisdom, skills, and perspectives that you gain from experiences can compound just like interest in a bank. When you gain a new way of thinking about the world, you immediately put this new approach into action and benefit from it. With the new approach, you have greater leverage in gaining yet more value from life. The more experienced, wise, mature, and connected you become, the greater are your tools for gaining even more experience, wisdom, maturity, and connections.

All aspects of personal growth are compounding. Do not sell yourself short; maintain a balance that allows you to take advantage of compounding in more areas than just your savings accounts.