Lately, I’ve been contemplating the principles behind personal finance. In my search into all things FIRE, something occurred to me. The key principles to reaching financial independence can apply to your everyday life. Specifically, the concept of investing and the power of compounding interest.1Welcome PFC reader. If this is your first time coming to my site, you will notice these cool little footnote numbers here and there. They contain interesting side notes, information, and resources and resources that may prove useful on your journey to financial independence. Enjoy!! <——-Click me. I dare you!
Compounding interest is a really cool phenomenon. You may have heard the term used repeatedly on personal finance blogs. The concept is simple yet powerful.
Basically, it is taking your hard earned money (your principal investment) and putting it to work by investing in an asset (stocks/bonds/a business, etc.) that rewards you a cash payment (with most investments, this is known as interest). But instead of taking the interest earned and spending on a nice dinner or vacation, you keep that extra earned money invested to earn even more interest. To full benefit from the power of compounding interest, you repeat the invest and reinvest process. By doing this you can significantly accelerate your wealth generation.For a good definition and explanation, of compound interest check out this video:
The Most Powerful Force in the Universe
Compounding interest is central to creating wealth. This is not news to anyone. My man Albert Einstein is well known for saying:
“Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it. Compound interest is the most powerful force in the universe.”
People love to use Albert’s quote as a proof point of how important it is to invest your money. But I think there is something more profound in this statement. Notice he says it is the most powerful force in the universe. Could it be that the compounding phenomenon is a natural force in the universe? Over the past year, I’ve come to the conclusion that it is.
So what does this mean if this is true? It means the concept behind the power of compounding interest can be used as a framework to identify compounding behaviours that can contribute and manifest into what I have dubbed “A Positive Compounding Life”.
You’ve Known This Your Whole Life
The thing is, when I really think about this, I’ve known this intuitively my whole adult life. I’ve always known deep down inside of me that investing in myself, others, and my community has always paid back in remarkable ways 2 The dividends you receive from investing in something bigger than myself and others has been huge…immeasurable even! . The scary thing is that compounding impacts can have both positive and negative effects. I’ve witnessed the exact opposite negative compounding effect in my own life and the life of others every time selfishness, greed, negative thoughts, illness, and consumerism depreciate our lives.
What is a Positive Compounding Life?
The idea of a positive compounding life is still a new concept for me, so I have a feeling it may change over time. But for the time being, a positive compounding life has the following traits:
- Investment & Reinvestment: A compounding life is not about getting pleasure out of consuming something. Instead it is an investment in yourself and others that takes your energy, time, and skills. You may receive personal benefits, but you continue to reinvest in those things that you think create a good life for you and your community.
- Diverse & Complex: A compounding life is not just one thing you do or something you are familiar/comfortable with. Instead it is complex, messy, and involves many moving parts.
- Reflects Your Humanity: Living a compounding life truly reflects who you are and lines up with what you value 3 Question: Do your finances reflect your values and goals that support a compounding life? You should check out my own plan to align my financial goals and money priorities with our families values. .
- Challenging: A compounding life is not easy; it is bloody difficult. It’s hard, but well worth the effort.
What Does a Positive Compounding Life Look Like?
The question is how does one live a positive compounding life? This is a roundabout way of asking how do we as individuals, community, and as a species invest our limited time, skills, and resources to live a fulfilling life and leave a lasting legacy? Honestly, I am not 100% sure, but I do have some ideas that I’ve learned from my past that reflect principles and characteristics of living a postive compounding life.
Culture & Education: Compounding Knowledge
What distinguishes us from any other species is our ability to learn collectively. This is best exemplified in both formal and informal education. I have benefited from my formal education, because it gave me the ability to write, research, and the tools to learn new things. My informal education4 One of the most fortunate and effective education was my work in the non-profit world and having a mentor. I was fortunate that in my first real job somebody invested in me and taught me the ropes when to came to work, life, and community development. And the rest is history. learned in my field of work has given me the real world experience necessary to be impactful in my work and create mutually beneficial relationship. I cannot imagine what my life would be like without investing in my education nor my experience learning from and with others.
Relationship: Compounding Love
Prepare yourself, I am about to get real cheesy up in here!
Love is awesome, love is amazing, and love is powerful 5 Ok I am going to go on a bit of tangent. I think love is the most misunderstood concepts out there. Love in this case is not about a feeling, but it is more about an action. Love is about relationship and loving them even when you might not feel love for them. Best example I have is my marriage. My wife and I don’t always feel love for each other. But I will always make her a cup of coffee in the morning and turn on her electric blanket before she goes to bed, even if we have a fight or battle of the wills.I will always be there for her no matter how I feel at the time. Love is the sacrifice of the self for the other. Ok tangent over. . Investing in meaningful relationships with family, friends, and those around you is probably the most impactful and positively compounding action ever. Those of you with children probably know what I am talking about 6 When my wife and I had our first child, something very strange happened. Yes, I totally feel in love with our daughter, but there was something else. It was like a floodgate was opened and it felt like my heart grew three times it’s size. From that day forward, I not only had a love for my child, but now I have a love for ALL children. I literally want to take care of all the kids I meet (I don’t because that would be weird and creepy). By the way, when we had our second child, my heart grew ten times. If you’re calculating the numbers that is a 3,000% return! We plan on having a third child. . Do this well and surround yourself with the people who are willing to invest alongside you and the compounding benefits are limitless.
Health: Compounding Quality of Life
Your health is not to be taken for granted. The time and investment in exercise, healthy eating, and sleep is well documented. And I would be remiss if I was to leave out mental and spiritual health 7My Christian spiritual faith has played a key role in living a compounding life. I truly believe without it my ability to love, serve and give would be seriously hampered in all aspects of my life . In fact, I would put mental and spiritual health above all other physical health benefits8 Hey I am going to Keep it #100: I am not afraid to admit my own mental health issues. I’ve suffered from bouts of depression and anxiety, and found the need for counseling throughout my life. My advice is to tackle your issues head on and seek the help you need. . The compounding impact of healthy spiritual, mental, and physical habits exists throughout your life. Take the time to inject some healthy living into your overall life goals and you will never regret it. In our society this is probably one of the hardest things to overcome, given the many conflicting marketing messages from the food/drug/health industry.
Community: Compounding of Compounding
This speaks to my heart. Community is where all the above compounding elements intersect to create our current reality, and where all our collective efforts to make a good life manifest. 9 Contrary to our popular Western Culture of rugged individualism, we cannot take credit for our own attributes nor tackle life alone. Rather we live, engage and benefit from community. This includes living our financial lives in community . I’ve been a community developer throughout most of my career and witnessed firsthand the benefits. Being engaged in community and being a part of something bigger than ourselves speaks to our humanity. Since I left the community development game, I still volunteer on boards, committees, and for my church. I would say my experience in this area has paid off for me personally and get the most gratification out of life when I am part of a community. Some benefits include a deep connection to the people around me, an opportunity to both be helped and to help others, and knowing I am leaving a lasting legacy after I leave this world.
Getting More Than You Put In
The hard reality is that we all have limited time, money, and resources and knowing how to best use them is challenging. We all want to understand how to live well so that we can better our own and others’ lives.
In your mind and in your heart, you will know instinctively whether you are engaged in a compounding life. You will know that your return was greater than your initial principal investment in life. The best test is to reflect and ask yourself “was it worth all the blood, sweat, and tears to do something that was asked, required, and needed of me?” And your heart, mind, and soul will be unanimous in your conclusion, because you will be full to the brim with joy, contentment, and fulfillment at the end of your journey.10 If you don’t know what I am talking about, I am talking about that moment when you meet your maker (i.e. death bed). That’s right, you are going to die, so get off your bloody computer and go live a more compounding life! #ComeBackToMySiteThough
Thanks for indulging this newbie blogger and reading this rather long post. I hoe it provides you with hope and encourages you to both appreciate the power of compounding interest and the benefits you can get by investing in what is important in life.
Mr. Prairie FIRE
P.S. I am curious: What are you currently invested in that is creating positive compounding impacts in your life?