James Clear’s book Atomic Habits: An Easy & Proven Way to Build Good Habits & Break Bad Ones explores an interesting subject, on the compounding nature of the long game. While everyone is looking for big gains—the proverbial get rich quick scheme—there is a space that’s not getting as much attention.
Those who understand compound interest can make it work for them and those that don’t understand it spend much of life trying to get out from its shackles. When we think of compounding we typically think of finance and positive returns, as in “good compounding.” But compounding just reinforces what’s already happening — good or bad. There is no judgment. And compounding works outside of finance. So while we can compound money positively and negatively, we can compound ourselves as well.
The neutrality of compounding is what makes it interesting — as we can get it work for us. If we can replace a negatively compounding habit or mental discipline with one that’s neutral or positive, we instantly get better. And if we can accelerate positive compounding, we can really see the results.
Tiny, nearly imperceptible changes can make a huge difference when you factor in time. As the graph above demonstrates, the difference in tiny changes is astonishing.
Here’s how the math works out: if you can get 1 percent better each day for one year, you’ll end up thirty-seven times better by the time you’re done. Conversely, if you get 1 percent worse each day for one year, you’ll decline nearly down to zero. What starts as a small win or a minor setback accumulates into something much more.
Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.
When we watch people make small choices, like order a salad at lunch instead of a burger, the difference of a few hundred calories doesn’t seem to matter much. In the moment that’s true. These small decisions don’t matter all that much. However, as days turn to weeks and weeks to months and months to years those tiny repeatable choices compound. Consider another example, saving a little money right now won’t make you a millionaire tomorrow. But starting to save today makes it more likely you will become a millionaire in the future.
Our brains have a hard time intuitively understanding time, compounding, and uncertainty. All of those things conspire to work against us when it comes to habits and mental disciplines. Why choose to save $20 today when I could buy a bottle of wine and have instant pleasure? Our minds do not easily realize that $20 saved today could be $100 in the future. And if we do save the money, there is no certainty that it will compound positively, it could, after all, compound negatively and I end up with $15. Now you can begin to see why it’s easier to just live in the moment and do whatever you want.
But when we repeat 1 percent errors, day after day, by replicating poor decisions, duplicating tiny mistakes, and rationalizing little excuses, our small choices compound into toxic results.
As an entrepreneur, I’m always looking for opportunities. The opportunities that interest me the most offer superior returns, low risk, and a long duration. Just as investing in companies can give you the opportunity to find all three, so does properly investing in yourself. Habits and mental disciplines are controllable, offer enormous opportunity for returns, have extremely low risk, and you can use them for the rest of your life. More importantly, they allow you to diverge from the herd and advantageous divergence is the name of the game.