When I was in college, one of my close friends remarked that the gap between two individuals constantly increases over a period of time. His remarks were in context of their ability to achieve excellence in life. So, a person who is a high flyer as a student is also likely to do better in his professional life. Yes, there are exceptions to this rule but in general this holds true. I could never understand why he said so and was not sure whether I can agree to his statement or not. But almost 10 years later, I feel he was so correct.
Everything compounds in life, good or bad; material or non-material. The values we invest in ourselves, the habits we teach ourselves and the choices we make all compound on yearly basis. Thus, compounding which is popularly known as the most magical thing happening in the financial world is more powerful and omni-present than we think. But let us discuss why compounding is magical? Compounding is magical because it can lead to astonishing developments after a certain point of time. Let us say there are two persons; Person A and Person B. Person A saves 1 lac rupees in a year and invests it in some bonds giving 10 percent return. Person B on the other hand just does not believe in saving money and spends all his money on consumption. In fact, he borrows 1 lac rupees in a year to run his show. Thus, he has borrowed 1 lac rupees at 10 percent interest in contrast to Person A who has invested 1 lacs rupees to get 10 percent return.
Now, let us see what happens when compounding happens in the above two scenarios over a period of time. Person A’s initial invested amount of 1 lac will become 2 lacs in 7 years only thing he has to do is just sit patiently whereas Person B’s net-worth will become -2 lacs after 7 years. Thus, the initial difference between the two doubled in first 7 years from 2 lacs to 4 lacs and as time passes by, the difference between will double every 7 years. As years will pass by , it will become meaningless to compare the two as one would be sitting on good amount of wealth whereas other would be either chased by bankers or would have already declared insolvency.
This is very true even for human values and most of the humans remain oblivious of this fact. The differences between two people is often attributed to luck but its not luck, it is their habits and qualities compounded over the years. Our actions when repeated over a period of time become part of our personality. Why some people respond to a particular situation with anger and frustration whereas some remain unequivocally calm in the same situation? Why some people are lazy and why others are work-alcoholic? The answer is simple. Each one of the comparisons mentioned above is a result of two people practicing opposite habits over the years and resulting into two diametrically opposite personalities. Generosity, hard work, kindness, integrity, intellectual capacity all compound over a period of time and similarly, dishonesty, moral bankruptcy ,greed , selfishness also compound over a period of time. No doubt, you need not be wealthy to be generous and all wealthy people are not bound to be generous or kind.
The best friend of compounding is time. As the time passes by, the compounding happens on a large base each time and magnifies the impact of what is getting compounded. That is why , it is important that we must make our choices very carefully. Our choices and practices become so ingrained in our personality over a period of time that we ourselves loose control over them. Let us compare this with the compounding happening in financial world. After 35 years, the wealth of Person A will be 32 lacs whereas that of Person B will at -32 lacs. Person A has compounded his initial saving into a solid support whereas Person B has made himself fragile and vulnerable. While Person A will enjoy the positive compounding , Person B will have to undergo negative effects of compounding. The same happens with personal qualities. Some people will compound to become extraordinary human beings while some may compound to degenerate themselves. Therefore, it is important that we realize the power of compounding in our life and embrace it in a positive manner. Everyday counts and every action compounds. And thus, the only thing in our hands is to make a right choice and sit tight with it to see its magic happen over a period of time.