How to Apply Compound Interest to Any Area in Your Life

Today’s decisions determine the quality of your life 20 years from now.

Humans have the distinct ability to place ourselves in the future and think about how our short-term actions will affect us in the long-term.

Yet, so many of us rarely do.

Similar to other animals on the African savannah, our ancestors spent their days responding to grave threats, securing the next meal, and taking shelter from a storm. It made sense to place a high value on instant gratification. The future was less of a concern. And after thousands of generations in an immediate-return environment, our brains evolved to prefer quick payoffs to long-term ones. — James Clear

Like my Labradoodle at home, we are really good at identifying and worrying about short-term dangers and challenges.

But if we focus on long-term thinking and make changes now to affect our long-term goals, our lives would be much easier. You can apply compounding returns to any area of your life.

The best example of this is compound interest when investing.

The basic gist is to 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 or earlier. If you invest 25 times your yearly expenses over a short period, you can retire pretty quickly.

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 will have a much simpler life.

Think about it this way, every habit produces multiple outcomes across time.

Hard choices, easy life. Easy choices, hard life.

As James Clear writes so brilliantly, “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.”

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.

You may have to forgo that pretty $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 can retire, and all of your friends are still slaving away at their jobs (your feet will thank you as well; heels are not good for the health and well-being of your Future Feet).

Future You doesn’t want to still be working in twenty years; you need the retirement fund more than Present You needs another pair of $200 heels.

Be aware of instant gratification

In the modern world, we’ve taken creature comforts to the extreme.

When I buy my latte, I don’t even need my wallet; I can swipe my phone and it’s paid for. I no longer need to hire an editor when I have Grammarly. I can see the air quality in my living room on my air purifier app while sitting in a restaurant across town and change the settings to adjust for better air.

The modern mind is overstimulated with notifications and streaming services. The modern body is understimulated from notifications and streaming services.

All these comforts reinforce short-term thinking and instant gratification.

Computers have advanced, but human nature hasn’t changed. We’ve taken all the creature comforts and maximized them over time, leaving us drained, exhausted, and distracted.

They take from life as much as they “save” time.

How to change short-term thinking

Before you make a decision, think about how it affects you long-term

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, life is easier.

Start analyzing your day through that lens constantly, and you’ll find that before long, it starts to become natural to make the long-term choice over the short-term instant fix.

Practice long-term thinking

You won’t just magically become a long-term thinker. You have to work at it.

Similar to 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 — and going directly to the habit part.

You’re taking out the decision to invest each month by making it automatic.

Devise a concrete plan

One way to become more of a long-term thinker is to make concrete and detailed long-term plans for the future and write them down.

If you don’t think about what you want in the future, 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.

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.

When you can visualize the plan, it is easier to see the value in taking actions in the short-term that may not be “fun” but realize long-term gains.

Make monthly long-term goals for every area in your life

Monthly — make a detailed plan and sketch out what that looks like — what you want your life to look like X years from now.

When you have a mental picture to draw from and refer to as often as needed, it makes actualizing the plan more of a reality.

Get very specific.
Sit down and write it out on paper.
Do this for every area of your life that is important to you.
Ask yourself if you can take a long-term view of it.

Compound interest applies everywhere. It applies in relationships, in money, in health, and in fitness.

Common areas you can apply compound interest to by making long-term choices:

Financial
Intellectual
Health/Physical
Spiritual
Relationships
Family
Parental
Social

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?

Ask yourself, can I change up my habits to reap benefits in the long-term? What are those changes?

Let’s look specifically at the two areas most people are probably interested in — finances and physical health.

Financial

What have I accomplished in this area? 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 and I’m unable to earn an income? 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 for you.

What do you have to save to afford not working at age 50 so you’re able to have time to follow my other dreams?

Physical Health

How healthy am I currently in my body? What have I accomplished in this area? Am I overweight? How many pounds do I need to drop if I’m overweight, and what short-term choices can I make right now to get to my long-term goal a year from now.

Instead of focusing on deprivation, make a list of all the healthy foods you love, and then eat those.

I love avocados, dates, arugula, beets, apples; I’ll fill the frig with those things to keep it simple and fun.

Find the simple hack that makes the long-term effortless

Can you create an exercise routine that you do every day that is a consistent part of your life?

It boils down to choosing the long-term over the short-term.

One hack to choosing an exercise you’ll stick with is picking something you love to do.

Achieving goals doesn’t have to be miserable. You have a better chance of sticking with a routine if you love it. Maybe your body has suffered, and you aren’t in shape as you could be because you’re choosing the wrong program or your gym is in the opposite direction of every single place you usually drive to.

Choose the gym that is on your route to work or to your kid’s school. That is a simple long-term thinking hack in terms of health. Or if you hate the gym, walk outside for an hour with a friend. You’ll get to socialize, which is also beneficial to your health.

Write it out.

Make a plan.

Devise a system to undergird the pursuit.

Summary

Making the short-term choice fun and adding to your long-term goal is the key to a good life. Add a little bit of pleasure to the habits that pay off in the long-run.

It may not be “fun” to think about giving a third of your income to an account that won’t see gains for years to come, but think about the pleasure you’ll get when you look at it and marvel at your compound interest.

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 goal 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

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