I use the concept of compound interest to make a lot of the financial decisions in my life. If you’re not familiar with compound interest (or compounding interest), it's interest calculated on on your initial monetary principal, which also includes all of the accumulated interest from previous periods on a deposit or loan.
Compound interest is calculated by multiplying the initial principal amount by one plus the annual interest rate raised to the number of compound periods minus one. And as you can imagine, when calculating compound interest, the number of compounding periods makes a significant difference.
Anytime I have a major purchase I’m considering, I think “Do I want to make this purchase, or would I rather invest the money and let it reap the benefits of compound interest over the next 20 years?”.
This same concept can be applied to behavioral change, which is one of the most confounding roadblocks to business growth.
Just like investing, when you add a compounding effect, tiny changes in your behavior can yield remarkable results
A few years ago, I read James Clear’s “Atomic Habits”, which uses the same concept of compound interest to change unproductive or unhealthy behaviors. If you’ve made New Year’s resolutions that you’re already backsliding on, I’d highly recommend this book. Clear maps a process for micro-changes (1% per day) which, over time (thanks to the compounding effect!), lead to macro-changes.
This is the same advice I give to executive teams that are too embroiled in working IN vs ON the business. Even micro changes in time spent month over month (20% ON/80% IN, then 30% ON/70% IN etc.) are impactful even if they don’t seem to be in the moment. Just like investing, when you add a compounding effect, tiny changes can yield remarkable results.
What are the new habits you’re focused on cultivating in 2022? We’d love to hear from you.