Compound Interest Applies Everywhere in Life
Make short-term decisions with long-term goals in mind.
Hard choices. Easy life.
Easy choices. Hard life.
Humans have a distinct ability to place ourselves in the future and think about how our short-term actions affect our long-term goals.
Yet, so many of us rarely do.
Like my dog, Ruby, we are really good at meeting short-term challenges, like, where and when our next meal is coming. Rarely do we think about where we want to be 20 years from now. We may worry about it or daydream that we’d like to be on a beach sipping a margarita but taking daily actions in the short-term…that’s less natural to us.
If you don’t think about what you want in the future, five, ten, twenty years from now, you will keep making the same short-term decisions based on instant rewards.
Most people spend all day chasing quick hits of instant gratification: red dots, likes, too much caffeine, alcohol, a high-calorie treat.
But if you implement changes in everyday habits now to make your long-term goals a reality, life would be much easier.
It’s November, and even though I’m not one to make New Year’s Resolutions, I look back at the past year to see what went well and note where I can do better in the upcoming year, so daily actions stay in line with my long-term goals.
The best example of this is compound interest when investing.
The basic gist is you get a job, spend less than you earn and do something productive with the difference, like invest in an index fund. Do it each pay period, your money compounds, and you are set for retirement, 50 years down the road.
That is long-term thinking.
For many people, though, they don’t think beyond the next paycheck because there is no life or death need to invest in the short-term. Most people think if their bills are paid, they have a roof over their heads, and money in their pockets, they are good.
But success in any area boils down to long-term vs. short-term thinking. If you can just adopt long-term thinking into your mindset, you’ll have a much easier life. Think about it this way, every habit produces multiple outcomes across time.
As James Clear so brilliantly writes in his book, Atomic Habits,
With our bad habits, the immediate outcome usually feels good, but the ultimate outcome feels bad. With good habits, it is the reverse: the immediate outcome is unenjoyable, but the ultimate outcome feels good.
Incorporate long-term thinking throughout your day. And make a plan for your future self. When you make a plan and come up with a system to support that plan — to lose weight, write a book, travel abroad for a year — you are making plans for your future self.
If you can find ways to fill your days with the things you enjoy right now that also have long-term benefits or lead to a long-term result that you actually want, this is the ultimate life hack.
Start analyzing your day through that lens constantly, and you’ll find that before long, it starts to become natural, like a muscle you are building.
Step One
Come up with a list of areas in your life that are important, and you want to see improvement. Compound interest applies everywhere. It applies in relationships, money, health, and fitness.
Here are some:
- Financial
- Intellectual
- Health/Physical
- Spiritual
- Relationship
- Family
- Parental
- Social
Step Two
Sit down and write your future goals out on paper. Do this for every area of your life that is important to you and ask yourself if you can take the long-term view on it.
For each area, ask yourself the following questions:
What have I accomplished in this area? Where can I do better? What do I want my life to look like in this area five, ten, and twenty years from now?
Let’s look specifically at one area that people find interesting: Finances.
For example:
What have I accomplished for my financial stability? Am I financially secure? Do I have 6- 12 months of an emergency fund saved? If not, what amount of money do I need to live for 6–12 months if catastrophe strikes or I lose my income? What do I have to put aside each month to reach that goal? Am I on track to retire at age 50? Or 60. When do I want to retire and do something else?
Figure out what that number is.
What do I have to save monthly to retire at age 50 and follow my other dreams?
Make a detailed plan and sketch out what that looks like; when you have a mental picture to draw from as often as needed, you’ll make better short-term choices to realize your long-term goals.
Step Three
Come up with a simple hack you enjoy to change your habits to reap long-term benefits. The great hacks make the short-term choice palatable to keep your eyes focused on the long-term goal.
For example:
- Finances — Set up an automatic withdrawal from your checking account to go right into a retirement account.
- Health and fitness — If your gym is in the opposite direction of every place you normally drive, choose the gym on your route to work or to your kid’s school. That is a long-term thinking hack in terms of health. Find an exercise you enjoy and not one you hate. If you hate going to the gym, take a tango class. You’ll lose weight while having fun.
- Nutrition — Instead of focusing on deprivation, make a list of all the healthy foods you love and eat those. I love avocadoes, dates, arugula, beets, apples. I fill my frig with those. Everyone has something they love to eat that is nutritious.
- Intellectual — Read what you love until you love to read. Read romance novels or sci-fi until you fall in love with reading, and then bite into the more foundational books.
- Relationships — Kiss your partner every time you walk into the room, and you’ll be amazed at what this does for your relationship.
- Parental — Take a walk with your child without your phone a few times a week; you’ll be getting exercise and getting to know your child.
You get the idea; these are all easy, simple choices that have compounding rewards you won’t see immediately but make a significant impact on the quality of your life.
You can’t buy those $200 pair of heels in the short term if you’re putting half your paycheck in an index fund, but it will sure feel great 20 years from now when you retire, and your friends are still slaving away at their jobs.
Your Future Self — who doesn’t want to work in 20 years — needs the retirement fund more than your Present Self needs another pair of $200 heels.
Our physical health is affected by our past decisions concerning eating and exercise.
People overeat in the short-term when they know it increases their risk of poor health and obesity in the long-term.
It feels good in the short-term to eat that Big Mac with cheese, a side of fries, and a chocolate milkshake, but you are paying long-term dividends on your health.
How to change short-term thinking
Just like creating any habit, like a daily writing habit, long-term thinking is like a muscle; the more you use it, the stronger it gets.
When you give your habits time and space in your brain or through implementation, with enough repetition, you get the urge to do the right thing, even if you can’t say why.
That is why tools like automatic withdrawals from your bank account each month into a 401K account are so powerful. You already made the decision, once, to invest in your future self. You’re skipping the motivation part — because motivation is not reliable — to the habit part. You’re taking out the decision to invest each month by making it automatic.
You won’t just magically become a long-term thinker. You have to work at it.
Reading the goals, you wrote down in step two, monthly, reinforces and reminds you of your future plans.
When you can visualize the plan, it is easier to see the value in taking actions in the short-term that aren’t always ‘fun,’ but realize the long-term goals when taken.
As French economist Frédéric Bastiat explained so well,
It almost always happens that when the immediate consequence is favorable, the later consequences are disastrous, and vice versa…Often the sweeter the first fruit of a habit, the more bitter are its later fruits.
It boils down to choosing the long-term life over the short-term quick feel-good thing.
It may not be “fun” to think about giving a third of your income to an account that won’t see gains until later but think about the pleasure you’ll get when you look at it a few years from now and see how much it’s grown.
Make the short-term choice palatable so that it sustains you for the long-term and inspires you to keep your eyes focused on making life easier for your future self.
Figure out the quick hacks that make the long-term feel effortless to you, and then, you win at life.
The costs of your good habits are in the present. The costs of your bad habits are in the future. — James Clear
Jessica is a writer, an online entrepreneur, and a recovering type-A personality. She lives in Los Angeles with her extrovert daughter, two dogs, and two cats.