THE NINTH WONDER OF THE WORLD

From Guest Author Nicola Cairncross

Compounding is often described as the ninth wonder of the world. It is a concept that initially sounds very unexciting, but when you understand how compounding just quietly gets on with working its magic – or conversely its naughtiness – it’s a very exciting concept to grasp indeed!

It’s the difference between linear and exponential growth, or put more simply, about earning (or incurring) interest on the interest on the interest, generated by your savings (or your debt).

It’s a very powerful tool and can be likened to the wind under the wings of a jet. The plane creeps along the approach runways, then moves into position, then starts down the runway slowly, but as it picks up speed, the power of the engines and the wind lifts its wings and it takes off, climbing very quickly and steeply into the sky.

Compounding can turn just one – just one – 1 coin into a million pounds within 20 years. If you took 1 and achieved a 100% return on your money each year (put another way, if you doubled your money each year) then you would most certainly be a millionaire in your lifetime. Imagine if you added another 1 each year – how much faster would that get you there?

And if compounding is that powerful when applied annually, how much powerful could it be when applied monthly or even daily?

On a personal finance level, most people ignore the potential of compounding, because the % interest rates we are quoted by the banks, other savings vehicles and financial institutions are so paltry. If you took 1 and increased it at the usual 3% or 4% per annum, then it would grow so slowly that we might as well not bother saving at all. You would be dead several times over before your personal wealth increased noticeably.

I know I used to feel like that! Why save now, especially when you are only saving to spend later, and when you can only earn 3-4% per year on your savings? I want to share with you, today, some of the exciting things that I learned about the power of compounding, things made a huge difference to my thinking about money. And changed me from a non-saver to an investor in one fell swoop!

There is a huge difference between saving and investing, and experienced Investors achieve returns on their money between 30% and 100% per annum – some even manage to achieve an infinity return on their investment, because they are able to pull their own money back out of the deal, which means that they are making money with no money. These are the supermodels of the investment world!

On a personal finance front, even looking at the returns generated by investing in property over the years (12% per annum) and the stockmarket (14% per annum) gets a little more exciting. The compounding effect means that, on average, property doubles in value every 7-10 years – that’s a thrilling thought!

There is a great example of the difference in what you can achieve in just two years, if you invest $60,000 by buying outright one small rental flat, versus what you would achieve if you invested the same $60,000 in deposits on several small rental flats. At the end of the two years, if you just bought the one flat, and assuming average rates of growth, you would be worth $6384 more than when you started. But if you invested in deposits on several flats, you would be $56,304 better off. You choose. That’s compounding at work.

On a business level, compounding can work for you too. The difference between what you can earn if you are a solo self-employed person, and what you can earn if you build a business consisting of a team of “you’s” is quite amazing.

The compounding effect can also be utilised in your business by automating as many of your business processes as possible. Think of the potential difference between having the services of one marketing person and one sales person (both of whom can only work so many hours in a day, both have to be paid, even when they are on holiday or off sick, so not working) and then consider the possibilities of having an automated marketing machine working 24/7 plus a team of affiliates – unlimited numbers of independent people who are all being paid a little bit, on sales (results only!) to promote your service or product.

So How Can You Make It Work For You?

Lean Marketers ™ are always looking for ways to make their marketing spend go further. One way to do this is to ensure you understand the process of the Lean Marketing Sales Pipeline (if you haven’t got it yet get it now). The final step, that many people forget about is how you’ll take advantage of compounding. The final step is to ensure your happy clients become evangelists. Having tactics in place for turning repeat clients into evangelists is key to your success. In the next issue we’ll look at this more.

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