Einstein is supposed to have said that the most powerful force in the universe is compound interest. It looks like he probably didn’t, as nobody can seem to find a context for that remark. Whoever said it, it’s profound enough that it warrants endorsement by a famous genius.
I bet Einstein would have been someone who understood that compound interest applies to much more than money. Compounding works everywhere, and our interests concern a much broader set of values than money.
Every established blogger knows, for example, that the hardest web traffic to earn is the first few thousand hits, because they must come from nowhere. You must put in time promoting it: commenting on other blogs, making connections, manually pitching your produce to people who have never heard of you and may have no reason to give it a look.
Once you’ve earned some traffic, then more traffic grows on that initial hard-earned traffic. If your labors have built something with value, then you soon reach a point where you don’t need to promote it. You just need to maintain an active blog. The promotion you did in the past is now promoting it for you. You are living off the interest.
With money, we know that it’s a better deal to buy something that makes money than something that loses money, even if they cost the same today. The idea of harnessing compound interest is to understand the tremendous value of that that which naturally generates what you value. A thousand dollars worth of rising securities is worth way more than a thousand dollars worth of currency, because with you’re not just receiving their current value but many years of their capacity to create value.
The whole point of life is to get rich. If you would scoff at that, then maybe you define riches too narrowly. Actual wealth is the capacity to create quality of life. Money is secondary to actual wealth, because it’s worthless except for one purpose: a flexible tool for building quality of life for you and your loved ones. What you build is your *real* estate, which really only amounts to what it feels like to live your life, and your capacity for making it feel like you want.
Regular readers may have noticed a surge of money-related posts recently. I haven’t become more materialistic — this new fascination is not with money or even things, but with the power of compound interest with respect to real wealth.
Every choice we make is an expenditure of some sort, of time, of energy, of patience, of well-being. Some of those expenditures return us a straight-up, one-time gain: spending an hour on something that would take two hours tomorrow, for example, like washing your dishes before they get crusty and harder to clean. You could call this simple interest.
In 2012 I experienced astounding levels of compound interest in my quality of life. I made a few good investments, and the payoffs were tremendous over the course of the year.
In particular, invested socially, because that’s where I felt a deficit. I reached out to old friends. I went to meetups with strangers even though it made me nervous. I asked for dates. I spoke up at times when it was slightly easier (in the present moment, at least) to say nothing. These felt out-of-character at the time.
For most of my life I had always tried to scrounge the low-hanging fruit of the social world. I was dependent on my existing friends to deliver social wealth to me. I never made the plans. I waited for invites, I never offered them. I put little into the whole sector and got relatively little out of it.
This year I discovered that friendships compound beautifully, if you invest in them. One new friendship, if you consciously contribute more than the minimum, is likely to deliver several friendships over time.
The most amazing part of of managing your quality of life as you would financial wealth is that the returns can be astronomical in comparison to those of even the most lucrative monetary investments. An index fund that returns 15% a year would be a relative gold mine in terms of financial wealth, but that’s nothing in the realm of actual wealth. Investing in one budding friendship with enthusiasm and proactivity can easily deliver several additional rewarding friendships over the next year, which each in turn can deliver several more over the following year. You can quickly generate more social wealth than you can actually use, just as you would with monetary wealth if you found a mutual fund with a 200% annual return.
Last January I stepped out of my comfort zone a bit to stay with a friend I only knew online when I went to New York City. I have houseguest anxiety, and at the time I was nervous of any unfamiliar social situations (I can’t believe this was only a year ago!) and I remember having the thought that it could be awkward, and I would not have to risk that if I stayed in the YMCA for the whole time instead. I used to have thoughts like that a lot, and sometimes I heeded them.
Of course, we had an amazing time and today he is one of my favorite human beings. But that’s only a sliver of the overall returns arising from that little leap. Through that friendship I almost immediately gained a whole circle of friends in New York City, and had a wonderful romantic relationship that left me permanently more open and more confident, leading to more fulfilling relationships back home.
The trip left me feeling inspired and connected. I moved to my own city’s most interesting and densely populated neighborhood, falling in love with my own city the way I had with New York, and naturally meeting even more friends, which opened me up even further. Almost all social tentativeness, which had defined and stifled my life for the last decade, is now gone.
The compounding continues. My rapidly-developing outgoingness means that I find my daily to-do items far less intimidating. And so I’m procrastinating less, which naturally leads to my being more productive, which leads to greater confidence in what I believe I can achieve in life, all of which together make me more relaxed and assured, which improves even my posture, my health and my attractiveness to the opposite sex, which compounds confidence again, and so on. The difference between what it feels like to be me this January compared to last is staggering.
Quality of life compounds, even better than money does.
But you do need to invest. If you want extraordinary returns, you need to pay, which inevitably amounts to leaving your comfort zone in some area. This is something you should do anyway, because the act of operating outside your comfort zone is the act of expanding your comfort zone.
Most people reach a state of equilibrium, with respect to comfort zones, and stay there. That’s the natural influence of a comfort zone: to keep you in the same place. Comfort zones are actually kind of sinister in that way. There has never been a year in which I confronted more long-standing fears, and never was a year so fruitful.
Just like a financial nest-egg, simply having more relationships — to name only one area where quality of life can compound — creates space and security that makes you less dependent on any particular source of social wealth. You can have a falling out in an important relationship and be fine. So you don’t worry so much about the impressions others have of you, and you feel freer. By the same principle, the lifelong money-saver can lose his job and be fine, and so his working life is devoid of the fear of financial ruin, even if he never has to touch his reserves. This alone is a tremendous dividend.
Opportunities for harnessing compound interest are all over. I keep discovering them hiding in my comfort-zone-derived habits.
An example: cleaning up a mess at the first possible opportunity creates consistent, daily returns, because messes borrow from your quality of life at interest. I can clean up the dishes immediately after dinner, which is the cheapest time to do them (in terms of effort), or I can let them sit and look and smell gross for four hours, which detracts quality of life from every single thing I do in their presence during that time.
Would you rather watch a movie on Netflix with a sinkful of dishes waiting behind you, or watch the same movie knowing you have no outstanding dirty work afterwards? Each option has the same cost in effort, and one is clearly worth more. Invest in that one, even if you’re less inclined to initially.
Take a broader view of this. Imagine what you could do with a few years of habitually aggressive investing. By making wise investments, you can gradually build a life so well-populated with relationships that all the social activities and connections you can handle come right to you without your even needing to reach out. You could make a life in which you’re fit enough that working out is more of a thrill than a drag, one in which it’s easier to keep your place clean than let it get messy, one in which your discipline is self-sustaining.
The ultimate goal, just like in personal finance, is to reach the point where you can live off the returns alone.
Photo by ComputerHotline