Overview of the Compounding Effect

The compounding effect isn't so much a law as it is a principle or a mathematical equation: A = B•e^rt, where:

• A represents the final outcome
• B represents the initial starting point
• e is a natural constant
• r is the rate of growth, and
• t is the time over which this growth happens

Before you go plugging numbers in, the principle is simpler than this equation. The principle forms the foundation of modern economies with reliable interest rates and inflation. For the sake of simplicity, suppose you found a way to gain 10% of your invested savings as additional income per year. You start with $1000. At the end of the year you'll have 10% of $1000 as additional savings added to what you started with. So you'll have $100 more, bringing your total savings to $1100.

Simple enough, right? The compounding part comes from the fact that it's the percentage that stays constant. So 10% of $1100 is now $110 in income the next year. Notice the $10 extra in the second year. Repeat this again for the following year and you'll get an additional $121 the year after that. Repeat this for about 8 years and you'll have a little over double the amount you started with. That's two years less than what it would take if the growth was linear and stayed at $100 per year. Those two years are the difference between linear growth and compounding growth. Over a long period of time (30 years or more), the effect is even more pronounced.

Compounding Improvement

The compounding effect is why investing in education in early childhood and young adulthood has such a dramatic improvement in outcomes. The Information Age has accelerated this trend even more dramatically by introducing avid learners to fast search and advanced recommendations for their content. This investment in information can have outsized returns in later life in the form of better job prospects, quality of life, health, and well-being.

In fact, whichever areas you choose to focus on in childhood and young adulthood have the potential to improve dramatically through focused effort. Whether it's gaming, content creation, writing, science, or arts, the sooner you start the easier it will be to keep up and excel later in life.

The caveat is that progress isn't always a smooth curve. There are several bumps life throws along the way, health being a potential one. Stephen Hawking was famously both brilliant and handicapped from birth. This didn't stop him from making enormous contributions to black hole physics. Yet, he had enormous challenges along the way that to some may have seemed insurmountable. The investment he made early on in his education carried him through and allowed his theories to flourish later. Such is the power of compounding improvement.