COMPOUND INTEREST IS THE EIGHTH WONDER OF THE WORLD. HE WHO UNDERSTANDS IT, EARNS IT… HE WHO DOESN’T… PAYS IT.
The power of compounding and compound interest is a common concept in the world of investing. The power of compounding in the world of investing is the snowball effect that happens when your earnings from an investment begin earning money in addition to the original amount invested. (This article has a lot of snow references because I am sitting in the middle of a blizzard in our house in the mountains.)
The snowball (your original investment) picks up more snow (dividends and interest) as it rolls down hill, making the snowball larger and larger, which in turn picks up even more snow as it continues to roll downhill. Vanguard has a great article on investment compounding and you can see the difference between reinvesting dividends vs. taking distributions, and how the power of compounding affects the growth of your money over time.
Compounding your work applies the principles of compounding to your work effort. Imagine standing at the top of a mountain slope and being able to create multiple small snowballs and rolling them down the hill. As each of these snowballs roll down the hill, they get larger and larger, picking up more snow as they continue to grow and roll down the hill. You remain at the top of the hill, making more and more snowballs and continue to roll them down the hill. In a 10 minute period, you have made 10 separate snowballs and sent them down the hill. You have in effect leveraged the slope of the mountain and the power of gravity to help you gather more snow.
Another person on the hill next to you makes 10 snowballs during the same time period, but puts them down next to himself (probably to throw them at you shortly). At the end of the 10 minute period, who has more snow? If you both rest for 10 minutes, who has more snow? Your snow keeps growing and growing over time, compounding your work performed over that previous 10 minute time period.
Assuming that you both work at the same speed, the other person can never equal your snow gathering ability, and soon, your snowballs rolling down the hill will make more for you without working than the other person can make working on snowballs full time.
The concept of compounding and applying it to work effort enables you to focus on the things that can turn into rolling snowballs and avoid working on static projects.
What things can I work on that have the potential to turn into these money-making snowballs? The concept of levered income focuses on activities that compound your work. The reason that selling your time (either by salaried, hourly, or contract work) rates a 1 Lever Rank is that there is no compounding of the work effort. You make $25.00 for 1 hour of work, and that work effort is forever lost, never earning you money again.
What if you spent 1 hour writing an article for your affiliate marketing website that would earn you $2.00 per month for the next five years? That is $120 in income over five years. Want to start an affiliate marketing business today for free? Read my review about what I think is the best way to get started here.
How about spending an hour researching a perfect domain name, buying it for $10.00, and putting it up for sale at almost a 150x markup? Have an idea for a great domain name and want to get started in “Digital Real Estate Investing”? Search here for free to find the best domain names.
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These are just two examples, but the idea is to focus on work that can snowball into something much larger over time using the power of compounding.
Capital is critical, and working at a salaried, hourly, or contract job is not bad. It enables you to acquire the capital to branch into other activities with higher lever rank and to begin making those snowballs. Think of working a job as getting you to the top of the mountain to be able to make snowballs.
The affiliate marketing and domain sales examples above require very little initial outlay to get started (starting with Wealthy Affiliate is free and buying a domain name from Namecheap costs less than $15). These examples have such high Lever Rank (85 for Affiliate Marketing and 50 for Digital Real Estate Investing) because of their low cost of entry.
If you are working a job paying $25 per hour, one way to make that work effort continue to earn for you is to invest that $25 in the securities markets (mutual funds, ETFs, REITs, and dividend stocks are examples) that will grow and compound for you over time.
I focus on compounding my work every day. Each thing I do has the ability to snowball into something more. Sometimes I need to help the snowball to continue to roll down the hill by adding a more streamlined process to a business, changing firmware on a cryptocurrency miner, swapping into a higher paying REIT, or upgrading a website. The idea is to reduce the amount of “touch” you need on the snowball to keep it rolling.
I have found that things tend to snowball unexpectedly, and periods of high profits comes in spurts (I guess this is where the “make hay when the sun is shining” proverb comes from). Invest those profits wisely (whether it be in new businesses, investments or in yourself) to keep the power of compounding working for you.
Thanks for reading. Now I think I will go shovel the driveway and make some snowballs.
