Allow me to propose a simple question. If I were to offer you $3 million in cash today or give you a penny and double it every day for 31 days, which one would you take?
You might find the $3 million today to be quite tempting, and you wouldn’t be alone; most people would immediately choose the first option. However, when we do the math and figure out where both options stand after the 31 days expire, we find that the single penny has grown to a whopping sum of $10,737,418.
That’s over three times the value of the lump sum offered in the first choice. What this exercise teaches us is that most of us massively underestimate the power of growth and compounding.
Many college finance professors and personal wealth advisors present this calculation to their students and clients to highlight the power of compounding. With time and reinvestment, incredible growth can occur for even the smallest starting numbers.
Every time I hear this story, I’m reminded of how applicable it is to our personal and professional lives. When we make minor and sustained improvements to our thoughts, behaviors, and habits, we too will experience exponential growth and change over time.
Over the years, I’ve learned that implementing the compound effect into my life and finances requires two essential elements:
- Patience: The entire premise of compounding growth takes place on a chart where time is the x-axis. Patience is a virtue in life, and exponential growth must be given time to build its momentum and impact.
- Reinvestment: This is often the most challenging aspect of the process. Reinvestment means consistently putting in the work each day and delaying some of the gratifications. For many – including myself – this will require discipline and making hard choices daily that are consistent with long-term goals.
I have put this into practice in my own life by waking up (most days) earlier than I previously thought possible to exercise and prepare myself before family and work duties begin at 6:00 am. I also try to stay focused on my Quadrant Two activities and commit to them throughout the entire work day – a lesson from earlier in the year.
Through this simple process of “patient reinvestment,” we are able to stack one good week on top of another until we have months and even years of positive momentum. That is how our personal lives and work start to resemble the red line in the chart above.
This principle isn’t just for finance and personal habits either; it is a powerful tool for businesses and organizations. Nearly every successful business in existence today achieved its status by reinvesting its profits and improvements over an extended period.