By Frank Newman on 17th December 2014
Last week the BBC channel featured a panel discussion between this year’s Nobel Laureates in the fields of Physics, Chemistry, Medicine and Economics. The Laureates talked about the discoveries for which they were honoured, how those discoveries had been applied in a practical way, and how they reached the summit of academic achievement.
When speaking on the latter issue one made the very wise remark that hard work and application is like compound interest.
Perhaps he was picking up on the quote from Einstein, himself a recipient of the Nobel prize for Physics, who is quoted as saying, ‘Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.’ He also said, “The most powerful force in the universe is compound interest’.
Compound interest is powerful because you earn interest on interest, on interest, on interest, on interest. So if you invest a single $1 and make a 10% annual return, the value of the $1 investment grows exponentially: $1.10, $1.21, $1.33, $1.46, $1.61, $1.77, $1.94, $2.14, $2.35, $2.59, $2.85, $3.13, and so on.
A person on the average wage saving 10% of their income, invested at an average rate of return, would have accumulated $1 million by the time they are 63. For most people that’s more than enough to achieve financial independence. In provincial NZ it represents about four rental properties (one in Auckland!), each returning $15,000. In other words, they would have accumulated enough savings to earn passive rental income of $60,000, which would be more than they were earning while working.
While compound interest is usually mentioned in the context of money, the learned gentlemen used it in a much wider context, relating the compounding effect of effort to outstanding achievement.
He was in effect saying, if you work 10% more than your peers then after seven years you would have accumulated twice as much experience/knowledge/skill. After 12 years you would have three times the expertise! And that’s as a result of merely working four more hours in a 40 hour working week (or about 30 minutes of mindless TV viewing a night).
Clearly those who have more skills than others in their workplace will be the ones who gain promotions, or see business opportunities where others don’t. They are the ones who will become the managers and leaders in their workplace and in their communities.
For a property investor it may be doing 10% more research than other property investors – doing that little bit extra to find the great deals, the good tenants, the better financing proposals, and learning creative ways to add value to their property investments.
So when someone asks what they need to do to be successful, my answer is, you simply need to do 10% more than the next person. That’s 10% more work, 10% more training, 10% more motivation, 10% more thinking… just 10% more of whatever it is you want to do. Who knows where you will end up, but I have no doubt it will be a better place and you too may one day be one of a panel being interviewed by the BBC and asked to reveal the secrets of your success to a world-wide audience.