What is Compounding?
Mathematically speaking, compounding is defined as the “increase in the value of your investment, due to the interest earned on the principal along with the accumulated interest.” In case your parents, friends or acquaintances have been recently or for a long time been investing in stocks, mutual funds, cryptocurrencies, etc. or you would’ve not been yawning or sleeping in your 8th-grade mathematics class, you would’ve probably come across this term. The concept of compounding is at the heart of the finance world but in reality, is at the heart of our daily lives.
Importance of Compounding
Compounding, if defined using the above language, is a slow increase in any value, skill, or habit due to consistent practice which compliments the existing skills and helps us get better every day. The principle of compounding applies not only to good habits but rather all of our existing habits. If you the habit of waking up by 10 am every day or having junk food every night before going to bed, the habit keeps on compounding, and the cues and triggers that ensure that the habit continues subconsciously strengthen with time. Hence, it is really necessary to be aware and mindful of your habits every waking second of your life. It is understandable if the prospect of being aware to this extent sounds tiresome but the process of being aware is also automated once we get habitual to it.
Understanding the Science Behind Compounding
Awareness isn’t as tiresome as it sounds because it’s about asking yourself the reason for following a particular habit, understanding its long-term effects, and the value it adds to our lifestyle. According to the author of the book Atomic Habits, James Clear, any habit can be broken down into a feedback look that involves four steps: cue – it triggers our habit, craving – it’s the way our body is reminded of an activity or a thing and fills our body with desire, response – it is the reaction of our body to the craving, reward – once we give in to the habit, we receive a certain reward which is generally what leads to a dopamine release. The book “Atomic Habits” is one of the most powerful books on habit creation and is highly recommended for anyone looking forward to understanding the science of habit creation in a highly actionable format followed by building good habits themselves.
Importance of Compounding in Habit Creation
The biggest issue with applying anything new in life is that people generally don’t go in-depth into understanding the ‘whats’, ‘whys’, ‘hows’, and the science behind the theory. When it comes to planning, people often make long-term plans but miss one of the dimensions of SMART planning, namely Specific, Measurable, Actionable, Realistic, and Time-Bound. Making actionable plans are necessary and an even more necessary thing is to learn how to break your plans and goals into small and consistent habits. Instead of aiming for 30 min of meditation, pick 10 min of meditation every day at a specific time or followed by a specific habit in your daily life. Before you realize it, you would’ve meditated for over 60 hours in a year. Similarly, instead of having crazy workout ideas, small controlling factors on our diet like ensuring no junk food and only healthy vegetables in our grocery, a specific eating time along with specific portions and a 5 km walk every day will change your entire body and habit cycle in a year. It will also ensure that you’ve walked for over 1800 km every year.
Importance of Compounding in Upskilling
Compounding works well for the process of upskilling. In his Ted Talk The First 20 Hours – How to Learn Anything, Josh Kaufman talks about how books like The Outliers and multiple theories point out that it requires us 10,000 hours to become experts in any skill. There aren’t any issues with the statement before but considering the rapid change in the technology and environment in the 21st century, it won’t be necessary for an individual to be an expert in skill but rather have the knowledge and the ability to quickly pick up any skill to become hireable. As Josh mentions, an average human requires at least 20 hours to pick a skill and be mildly good at it. This study has huge implications on humankind living in the new era, considering the current requirements of the job market.
This is also where the art of compounding comes into the picture. Consider that you want to acquire a new skill which may be for official job purpose or may be required for personal development. It is generally noticed that people pick up learning a new skill and either try to achieve it all at once or lost their consistency quickly. Instead of that, take a specific hour out of your everyday schedule and practice the skill for 21 days and the rest is assured that you’ll start to get a hang of it. Another favorable point is that the upskilling process for that particular skill will be a part of your daily routine and will soon become a positive habit. Once you cross the 21 days mark, you’ll start to see progress in that particular skill, and the more consistency you show post that, the better you’ll get.
How has Compounding Affected the Author – A Personal Experience
The art of compounding has affected me greatly. I took my year’s resolution at the end of January after actually developing the habit of upskilling. I’ve been working on learning a data-based approach to solving any problem. In the span of two and a half months, I’ve finished an Excel Specialization containing 4 courses, a course on making business presentations, and half of a Tableau Specialization, all as a result of consistent effort. If you want to see the power of compounding, watch How to Achieve Your Most Ambitious Goals by Stephen Duneier. Lastly, the tips and tricks mentioned here only make the process of habit formation easier. The biggest factor of habit creation is the ability to make decisions. Hence, if you want to change your life in a more meaningful way and form good habits, it is up to you to make the correct decisions.