Numbers

I’m not sure if it’s true, but it is said that Einstein declared the 8th wonder of the world to be compound interest.  Compounding is the one force that can give you exponential gains over time.  I don’t know why but for most of us it’s in our nature to think in a linear way.  Addition, instead of multiplication.  You have one person, then two, then three, then four.  Whereas the real power comes when you have one person, then two, then four, then eight.  That’s the difference between compound and linear thinking.  Those additional people make the work, or accomplishing your goals, much easier.

Warren Buffett is the grandfather of compounding.  He didn’t invent it by any means, but he did dumb it down enough for the rest of us to understand.  It’s the power that given enough time, compounding will make you rich, or rob you of all your wealth.  You get the doubling of money will make you rich, but how will compounding make you poor?

Inflation is a type of compounding that will make every dollar you own decrease in value.  It chips away at your spending power year after year, until what you had, just won’t cut it anymore.  It no longer buys the groceries.  It no longer supports your daily expenditures.  It simply makes it more difficult to live.

On the other side, if you’re able to compound your money at a rate greater than inflation, you are making real gains, and you end up with more spending power in the future than you had today.  That is the true key to building wealth.  More purchasing power in the future on a real dollar basis.  So when you invest, use that as your measuring stick.

Speaking of measuring, something I’ve learned about people and business is what gets measured, gets done.  If you measure sales, sales will grow.  If you measure costs, they will shrink.  Number of calls?  Number of contacts?  Number of anything, and that will grow.  Even more so if you align incentives with performance.  If people get paid more if your profit increases, guess what’s going to happen?  If you want something to change, measure it, and the factors that impact it, and people will make it change.

You can measure change using indicators, and these indicators fall within three main categories: leading , live, and lagging indicators.  Things that you are doing today, that don’t impact today, but will impact tomorrow, are leading indicators.  Things that measure where you are doing right now, that impact right now, are live indicators.  Things that measure what happened in the past, are lagging indicators.

Let’s take school for example.  Leading indicators are how many classes or lessons are you going to attend this week upcoming?  Are you going to all of them?  Are you going to watch relevant videos and schedule time to study?  Live indicators are what are you doing right now?  Are you studying?  Are you playing a video game?  A lagging indicator measures what’s already happened.  Your grade on that test.  The average for the semester.  Those leading indicators, assuming you stick to them become live indicators, that get you the results that show as your lagging indicators.

Another example is your health.  When you go shopping, are you only putting healthy foods in your cart?  That’s a leading indicator.  Are you exercising today?  That’s a live indicator.  When you step on the scale to measure your weight, that result is a lagging indicator.

Same with business.  How much time do you have scheduled for calls this week?  That’s a leading indicator.  Are you making the calls today that you need to?  That’s a live indicator.  How was your sales performance last month?  That’s a lagging indicator, but looking back at it, you know the outcome you are experiencing is a direct result of the work you put in, and how you track each of those things will determine your success tomorrow.

So even if you’re not in finance, don’t care much about compound interest or inflation, or how much business you get next month, what you measure gets done and will determine where you end up in relation to your goals.