Compounding is a term which is often talked about in terms of assets and the potential to obtain ‘growth on growth’ or ‘interest on interest’ over time.
Compound interest is often described as the ‘8th wonder of the world’ due to its powerful long-term effect, although outcomes are uncertain and depend on market conditions and individual circumstances
To be able to potentially achieve this, it requires discipline in two ways:
1. The discipline to not react to the temptation of short-term events, market movements and the distraction of other investment opportunities.
2. The discipline not to use/spend the monies earlier than originally intended or planned in your best interests.
Both of those things are much easier said than done, but important when it comes to long term financial success and this is something we try to help with by coaching, planning and strategising appropriately.
There is also another completely different area that can benefit from compounding, which is compounding experiences.
Many of the conversations we have in life are about experiences that we have had and are now sharing. This could be a big life event such as the birth of a child or graduating from university, a holiday or trip that you have taken, a location you have visited or even a meal/drink you have had. Life is full of them, they come in all shapes and sizes and they are happening to us constantly.
If the experience was notable, this lives long into your memory in a happy and long-lasting manner which we might talk about to acquaintances, friends, family and loved ones. That is where the compounding happens!
Experiences take us all the way through to being talked about in our final days – both the ones we have had and the ones we regret not having.
But compounding returns and compounding experiences can sometimes come into conflict. If we divert too much money away from long-term saving to fund experiences today, we may reduce our ability to benefit from compounding returns that support future experiences.
Finding the right balance between enjoying life today and planning for tomorrow is rarely straightforward. Many people find it helpful to think about their finances as a pendulum — if it swings too far towards spending, long-term security may suffer; if it swings too far towards saving, today’s experiences can be missed.
Here are my tips to trying to find balance between the two:
1. Optimise your essential expenditure as best as you can. This hopefully means that there is more available for spending on experiences.
2. You may want to consider whether to commit large amounts of capital to experiences you are unsure of.
3. Aim to prioritise experiences over objects purposefully.
4. Have a clear plan, timeline and preparation for experiences of greater monetary value.
5. Remember the phrase ‘little and often’ rather than solely thinking about once in a lifetime or bucket list experience.
6. Reassess where you are on the pendulum regularly. At least annually as a minimum, but quarterly or bi-annually would be even better.
So there you have it, how to try and navigate the conflicts between compounding returns and compounding experiences.
*Capital is at risk. Investments can both increase and fall in value. Past performance is not a guarantee of future performance.
** This article is for general information only and does not constitute personal financial advice. Any strategy should be considered in the context of your own circumstances.
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