The Compounding Effect of Patience

The subject of patience is a popular one on this Blog.  We have talked about having patience and taking a long-term view because life is a marathon, not a sprint, and that we should enjoy the journey.

We have also talked about how patience can build up our ability to delay gratification and how that is a trait that can help us achieve much greater success in the long term.

Another interesting aspect of patience is the compounding effect that it can have on our lives.  Compounding is when repeated actions grow upon themselves and eventually you have an impressively large result from seemingly small actions.  Compounding in money terms is when you invest money for the long-term and as it grows, it gets exponentially larger because the increasing size of the investments cause them to grow more quickly as the growth remains part of the whole investment.

A Dollar a Day

A simple example would be if you invested one dollar every day for 20 years.  You would have invested $365 per year for 20 years for a total of $7,300 at the end of the $20 years.  However, if the money grew in the investment, compounding would make it grow much larger.  If the investment great at just 5% per year, at the end of 20 years, your investment would be worth close to $13,000.  At 10%, the total would be almost $24,000.

This is because when you invest and leave all of the funds to grow without taking any out, as you make money, the total grows and so a larger amount grows overall.  In our example, after the first year at 5% return, our money would be worth about $384.  However, in the second year, our investment becomes the new $365 PLUS the $384 from the previous year.  We get our 5% return on the full amount, not just the initial $365, and every year, that growth gets added to the total.

You can see how quickly money will grow if you patiently leave it there for long periods of time.

Small Actions Big Rewards

The principle of compounding can be applied to any number of areas with incredible results.  If you want to lose weight and get in better shape, eating just a little less “junk food” like cookies, cake, ice cream, etc. every day can have very big effects on your health in just a few weeks or months.  Couple this with some light movement like walking every day and the effects on your body will be profound.  Neither of these tactics is particularly aggressive but doing them both gradually will have the compounding effect of you losing weight and getting into better shape.

Often people think that they cannot get into better shape but using the compounding of small actions can have big results.

The above investment example shows the effects of compounding on just $1 per day.  If you increased it to $2 or $10, the results would be vastly greater, even if these are still relatively small numbers.

You Can Do It

It is interesting to hear people who have unwittingly used compounding say that if they had to do something today, they would not be able to.  This is often the case with purchasing a home or saving for retirement.  What those people are not considering is the fact that they compounded their results, whether that was buying a home and then paying off the mortgage over many years, while benefitting from the growth in value of the home or investing small amounts in their company pensions or retirement accounts and leaving it there for the future.

The reality is that the type of person who compounds their actions would have done so at most times in their lives, regardless of the circumstances.  While it was prudent for these people to have bought a home or invested in their companies’ investment plans years before when they did, they probably would do the same thing now based on the type of behaviour that their patience creates. 

This is very comforting to people in the present who say that they cannot afford to do things because of increasing prices, lower incomes or any number of other issues.  The fact is, if you use the power of compounding and patience even a very large goal can be broken down into smaller steps that can be achieved. 

It may take more time than planned, but in the end, the achievement of the goal will be made easier by the effect of compounding their efforts and actions.