Albert Einstein called it the eighth wonder of the world.
Compound interest. Exponential growth.
When I introduced this concept to the students, we began with the simple problem of would they rather receive a fixed amount of $325 at the end of one month or the option of an amount doubling starting with a penny. Most thought this was a trick and guessed the penny of course but then they wanted to figure out why so they kept doubling the amount for thirty days. $0.01, $0.02, $0.04, $0.08…
They were astonished at what they accumulated after 30 days.
We looked at the variables of time, interest rate and the principal amount. We manipulate these variables to see how fast or how slow money can grow.
Then we looked at the cost of borrowing, for example, credit card interest or mortgages. This is something new. Some had never really understood what a credit card is or why it is different than a debit card.
We play with amounts and I tell them how time is on their side. If they start early with a small amount and a decent interest rate, and over a large amount of time, they can accumulate a large amount.
This leads us to the theme of delayed gratification and instant gratification. The stable yet gradual curve of long and steady growth versus the volatile spiked curve that can lead to massive gains but also risk of massive losses.
Sequential learning is an important skill – to understand the sequence of events; to understand second, third, and even fourth effects of decisions.
Taking time to make decisions also means delayed gratification because we have to be methodical in our learning and our thinking. We have to understand before we take action. We have to be clear with our intentions.
This framework of compound interest can also be applied to habits which I talked about as we set up a goal commitment contract.
James Clear, author of my older kids’ current favourite book Atomic Habits, writes:
Habits are the compound interest of self-improvement. The same way that money multiplies through compound interest, the effects of your habits multiply as you repeat them. They seem to make little difference on any given day and yet the impact they deliver over the months and years can be enormous. It is only when looking back two, five, or perhaps ten years later that the value of good habits and the cost of bad ones becomes strikingly apparent.
When we look at the aggregate of marginal gains and adopt a philosophy of aiming for a the tiniest improvement in everything you do, we see a shift in a different direction take place. All of a sudden that penny has turned into hundreds of thousands of dollars or those extra 10, 15, 20 pounds have disappeared.
It is this that I want the kids to learn – the way of the tortoise. The beauty of slow and small movements. The consistent repetition of each step moving in the right direction.
The patience of the long game.