The compound effect of change(DW #816)
Even those of us who are minimally financially savvy, may have heard about compounding savings or the magic of the doubling penny.
Here is how it is often explained:
You have two choices:
1. You receive $2.5m in cash today.
2. You get a penny and then you will get double of the previous sum every day for a month.
What should you choose? The $2.5m today or the doubling penny?
Well, if this choice presented itself in February, you would be better off with the $2.5m. After 28 days, your doubling penny is worth "only" $1.3m.
But for ALL OTHER MONTHS, you would be better off choosing the penny today.
Here is the math:
That one penny goes from 1 cent to 2 cents to 4 cents to 8 to 16 to 32 to 64 to over a dollar in 8 days … (slow progress, right?)
And then it starts to take off. As it keeps doubling over the month, it becomes $1.34m after 28 days and then it leaps from $1.34m to $2.7m on Day 29. Then from $2.7m to $5.4m on Day 30. And then, on that 31st day, it grows from $5.4 to $10.8m!!!
What can we learn from this?
Darren Hardy makes two important points in his book, The Compound Effect.
He explains that we need to remember that it’s is all about:
A. "A continuum of mundane, unexciting, and sometimes difficult daily disciplines" which are
B. "compounded over time."
And which make this magic happen.
In other words, when we are taking these small and positive steps in the right direction, they may seem really insignificant while we are doing them. And yet, they get compounded over time and lead to big impact.
It is ALL ABOUT incremental progress. Aggregated and compounded over time.
So… What are YOUR pennies? What baby steps are you taking consistently over time? Be diligent and patient and you will see the magic of compounding for yourself.
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