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Imagine for a moment that you’re at a ski resort in the Swiss Alps.
You’re standing at the peak of the mountain, looking down into the beautiful valley below. For no clear reason whatsoever, you decide to make a snowball and chuck it at your friend’s face. Just kidding. You actually roll it down the steep slope of the mountain and begin your observation.
As it starts rolling down, the snowball begins to gradually pick up speed. It’s an innocent little snowball at first, and then all of a sudden, it starts accumulating more and more snow and grows larger at a increasing rate. It becomes huge and uncontrollable, and when you realise the amount of damage the snowball could cause, you decide to leg it before anyone notices you.
Notice how the snowball started off really small but grew rapidly without you having to do anything at all. The steeper the slope of the mountain, the faster the snowball would grow right?
Now imagine if you could do this with money.
The Power of Compound Interest
This is essentially the main idea behind investment. The snowball is your money, and the mountain is the investment vehicle that you choose. The steeper the mountain, the faster the snowball will grow. The “mountain” could be stocks, bonds, and a hundred other examples, but for now let’s just focus on the idea of the snowball effect.
The snowball effect would be compound interest, and that’s the topic of today’s post.
Basically, that little anecdote about the snowball was my way of understanding compound interest. It’s an extremely simple, yet powerful concept, which, once understood, can be applied to your wealth to allow it to grow pretty much automatically.
Let’s begin with simple interest, which is the most basic form of interest. If you have $100 in the bank with a simple interest rate of 10% (Note: Banks usually use compound interest, not simple interest), at the end of every year, you would receive a flat $10 dollars.
The table below demonstrates the example.
|Beginning Investment||$ 100.00|
|Interest Rate Per Year (In Percentage)||10|
|Results/ Future Value:|
|Year 1||$ 110.00|
|Year 2||$ 120.00|
|Year 3||$ 130.00|
|Year 4||$ 140.00|
|Year 5||$ 150.00|
|Year 6||$ 160.00|
|Year 7||$ 170.00|
|Year 8||$ 180.00|
|Year 9||$ 190.00|
|Year 10||$ 200.00|
Compare this with compound interest, which would give you 10% on the cumulative balance of that year. So if you had $100 to start with, in year 1, you’d receive $10. In year 2, you would receive 10% of the cumulative balance, which is now $110. So this, year, you’d get $11, bringing your cumulative total to $121.
Here’s another table to the rescue. Over 10 years, this is how your initial $100 would grow, completely untouched.
|Interest Rate Per Year
|Results/ Future Value:|
At the end of 10 years, you end up with $259 dollars. That’s 29.5% more than than what you would have received from just simple interest. Over time, compound interest is extraordinarily powerful. At the end of 50 years,that same $100 turns into an astounding $11 739.09, whereas with simple interest, it would be a measly $600.
I’ve created an Excel sheet of a compound interest calculator which you can download and adjust all the values to see the effect of compounding. Alternatively, you can simply Google “compound interest calculator”, but this one shows you exactly how much the initial amount grows each year like in the example above.
Now that you understand the concept of compound interest and why it is so powerful, I’ll introduce you to the easiest way to get started with investing, even if you have no knowledge at all. That will be coming up in the next post, in which I will be explaining exchange traded funds or ETFs and how you can use them to start your investment journey.
Getting your money to work for you is essentially what investment is all about, and it’s a crucial skill to learn, especially while you’re young.
Investment doesn’t have to be complicated or even difficult. In fact, it’s possible to automate your investments so that all you’ll need to do is some minimal management. I’ll go through all of this step-by-step in the upcoming posts, but for now I’ll explain exactly why investment is so important.
Start With the End in Sight
I tend to look at the end result or the endgame before I engage in any venture, and it’s the same approach I used for investment. I usually start by looking at my goals, and then finding a way to get there. I want to have flexibility in my future and I think that investments, when done right, can provide that. This could be true for you as well, which is one of the reasons why I believe that it’s highly beneficial to learn this skill.
Let’s take a look at my long-term goals:
- Ensure a comfortable retirement
- Financial freedom
- Be location independent
- Create a passive income stream which I could possibly live off if I ever needed to
Everything on that list is about having flexibility. I would say that it’s a priority for my life, but of course, this could vary from person to person. However, if your goals are similar to mine, you’ll definitely find investment to be an invaluable tool for your future.
Retiring as a Millionaire
One of the biggest fears for many in the working class is not having enough money to retire. This is where investment comes in. The important thing to note here is that you can have almost any job and still end up retiring in comfort. In fact, I’ll write a post explaining how you could become a millionaire (at least) with very little effort.
This might sound like a plug for some kind of get-rich-quick scam, but I’ll say right now that it couldn’t be further from the truth. It will take a long time to achieve this, decades even, but it’s entirely possible to retire as a millionaire regardless of the type of job you have. However, that’s beyond the scope of this post and I’ll come back to it soon.
Of course, having a higher paying job will get you there quicker, but the point is that by learning to invest your money, you could potentially have a career doing something you love even if it doesn’t necessarily pay very well, and still end up with a sizeable nest egg.
Flexibility and Financial Freedom
Financial freedom is a priority for me because I want to be able to make decisions out of preference, and not out of need. There’s a significant distinction between the two. For example, I want to be able to travel around the world for months at a time without having to worry about where my next paycheck will come from. I also would like to be able to make career choices based on what I like doing, rather than having to buckle down and stay in one place just because I’m dependent on the salary I’m being paid.
Start Investing Early
To achieve that level of freedom and flexibility, it’s very important to start as early as possible, and that’s why this post is targeted at younger people (although anyone can benefit from it) simply because the potent combination of time and compounding you more potential to amass your wealth. I simply cannot stress how important it is to start investing as early as you possibly can.
I’m going to create a mini-series of posts about investment, which will cover topics such as:
- Compound interest
- Warren Buffett’s approach to investing
- How to pick stocks
- Valuing a company
- Investment resources
- Setting up an investment account
- Growth vs. value
- Strategy and when to sell
Many young people who start getting their first paychecks spend most, if not all of it, very quickly. They hardly give a moment’s thought to investing that money, but if they did, they would be much better off and possibly enjoy a secure future. Once I learned about investing, I began to look at my expenditure in a new light.
This didn’t mean that I started obsessively saving money. Instead, I began to think in terms of opportunity cost and started spending on things I valued, while cutting down on things I valued a lot less. I go into much more detail about this in “A Simple Hack to Transform the Way You Spend“.
I’ll leave it at that for now, but follow along with the series and hopefully you’ll be able to confidently make your first investment and begin taking your first steps towards financial freedom.
This post is strongly geared towards education, but the principles are universally applicable.
Failure isn’t what stops most people from achieving their full potential. It’s the fear of failure that is the real issue. It’s something that can be dealt with, and I’ll explain what I did to get past this. In fact, the goal -for me at least- was to become comfortable with failure, and know that I can get past it.
It’s important to fail because I know that if I’m not failing at least a few times every so often, that means I’m not trying anything new, working hard enough, growing, or taking enough risk.
My grandmother gave me a pivotal piece of advice when I was in my mid-teens. She quoted Henry Ford, who famously said “Whether you think you can, or you think you can’t – you’re right”. I have this quote plastered up on my goal-setting board (I know, what a creative name) and I live by this principle.
When it comes to achieving higher grades, many students fail before they even begin. The majority of battles are won and lost within the mind. Many of my friends have said some variation of the following to me when I ask them why they don’t aim for higher grades:
“If I don’t expect too much, then at least I won’t be disappointed if I fail. And If I end up succeeding, it’ll be a pleasant surprise”.
Getting Rid of Fear
Why be afraid of some disappointment and failure? That’s literally the worst that could happen. So why not aim really high and try your best to achieve it? What happens if you fail? You’ll come away knowing that you put in your best effort and that your tried everything within your power and therefore have no regrets.
You’ll definitely fail if you don’t try, so what do you have to lose if you do?
The “What do you have to lose?” question is incredibly powerful. Really ask yourself and list down some answers in your head or on paper. You’ll find that it’s really not as bad as you think.
People tend think that they have so much to lose and that the disappointment will be crushing if they fail. However, when I ask them to tell me exactly what it is that they’re going to lose, they usually don’t have much of an answer.
The feeling is psychological, and that’s what prevents them from trying. Once they realise that there really isn’t much on the line, and so much to gain just by trying, they usually end up much further than they expected.
Overcoming My Struggle with Math
Back in middle school, I was terrible at math. My friends could easily achieve a 90 percent in tests while I struggled in the low 40s. As many students in that position would, I decided math just wasn’t my subject and gave up.
This became a self-fulfilling prophesy. I believed that I was bad at math, and that’s exactly what I got. What you believe, you become. The secret is simple, alter the way you think.
Let’s go back to the quote by Henry Ford for a second. If I went into something, already convinced that I was going to fail, do you suppose that I’d somehow end up succeeding? 9 times of of ten, the answer is no. I might get lucky, but that’s the exception, rather than the rule.
Realising this, I changed the way I approached math in high school. Rather than think of it as horribly intimidating and difficult (which was pretty much guaranteeing failure), I began to consciously tell myself that math was easy and I was good at it. Of course, you probably won’t believe yourself at first and might even feel stupid doing it, as I certainly did.
It just needs to be an internal dialogue with yourself, so don’t be embarrassed and worry that you might fail and disappoint yourself. This seems pretty obvious when I say it, but most people seem to have an inbuilt system designed to prevent themselves from “bragging”, even to themselves. In this case, you need to brag. Just to yourself at least. Fake the confidence, until you start to believe it, and eventually it will become real.
This trick actually worked for me. After 3 months of repeating this to myself, I had literally convinced myself that math was easy and began to notice a dramatic improvement in my understanding of math, which translated into much higher grades. I applied this same trick to physics and chemistry in high school and the exact same thing happened. I went from barely scraping a 50 percent to averaging 80s and 90s.
It’s All About the Small Wins
I realised something else soon after this experience. I started having to study a lot less and put in a lot less effort. The reason was an increase in confidence. As a result of these early, small wins, I had begun to believe in my own ability, and I had removed the mental block that so many students, including myself, struggle with.
This has nothing to do with natural intelligence or talent. Of course, some people are naturally inclined towards these kinds of subjects, but I certainly wasn’t. I was extremely frustrated with myself until I started using this technique and I found that I could attain the same if not better grades than my peers whom I am still convinced were genetically tuned for excellence in math and science.
The power of belief is often underestimated. I’ve since applied this to almost everything in my life and noticed that it always works. Try this out for yourself and see how it goes. The caveat however, is that you have to try your absolute best to convince yourself until you really do believe in your ability. Doubt is always normal, but do your best to shove it into a corner, punch it until it loses consciousness, and leave it there.
Look to fail, it’s the best thing you can do for yourself.
It’s lonely at the top. Ninety nine percent of people are convinced they can’t do great things, so they aim for mediocre.
– Tim Ferriss
It’s quite a struggle to resist the temptation of purchasing on impulse when you’re at a shopping centre. In fact, my bank account was taking quite a beating because of my unhealthy spending habits and I constantly found myself struggling with buyers remorse.
Eventually, I pulled up my bank statement – eyeballs popping out when I saw how bad it was – and decided that it was time to put an end to it. It was a lot easier said than done. I later began to wonder if my usual optimisation approach could be applied to fix my overspending.
Enter the utility approach
(You can think of utility as an arbitrary measure of happiness – it’s a concept I borrowed from microeconomics)
I devised a method which was deceptively simple, and yet managed to significantly reduce my spending. Here’s how it works:
- I rank my potential purchases in terms of the amount of utility that I will derive from it.
- Since the measurement of utility is arbitrary, I assign odd-numbered values to my purchases. For example, on a scale of 1 to 9, clothing would give me a utility of 3, while a good pair of earphones would be a 7.
- I choose odd-numbered values because it’s easier for the brain to differentiate between a 3 and a 5, as opposed to a 5 and 6 because 5 and 6 are too close together to have any meaningful difference.
The rankings are based on a number of factors:
- How long the product will last
- How often I will utilise the item, or the frequency of use
- The opportunity cost (and this is a big one). Essentially, this means “What are you giving up, in order to buy this item?” I go into more detail later on in the post.
- For example, if I’m buying a set of speakers, I am giving up my ability to purchase the new Kindle that I’d been waiting for.
- How things/life will improve as a consequence of the purchase
So if, for instance, I’m looking to buy a new guitar, this would be my checklist.
- It will last many years
- I use my current guitar almost every day so it’s very likely I will continue to do so
- I’m giving up my ability to purchase the new jacket I wanted, the hiking boots, and will probably need to cut back on spending as it’s a large purchase
- Quality of life will significantly improve because it’s a very big part of my life and I derive a lot of joy from playing the instrument
If the product/experience is very valuable, lasts a long time, can be used often and improves my quality of life significantly, I award it 9 “units of happiness” or a utility of 9, and I can prioritise it over, say, a new jacket with a utility of 5.
Noel, a good friend of mine, taught me to look at purchases as long-term investments. If the price was high but provided good value and long-term use, that would be considered a good buy. Credits to him for showing me this way of looking at items.
Going through this checklist, even in your head, can dramatically reduce the occurrence of impulse buying. It forces you to think about how happy the item is actually going to make you. In most cases, it’s probably not going to make you happy or even impact your life meaningfully, in which case you can happily pocket your money and know that you’ve made the right decision.
Delay your purchase
A tip that’s helped me very often is to hold off on buying big-ticket items. Half the time, you end up realising you don’t really want the item that much or you find a better deal and end up saving a ton of cash. Wait a couple of days or even a couple of weeks and see if you still want to buy it. After all, if you’ve lived without it for so long, do you really need it now?
Opportunity cost and how it helped me cut my spending in half
Whenever I am about to buy something, I go through the checklist very quickly, and I always consider the opportunity cost. I am currently saving up to travel in Europe. This means that if I’m buying overpriced popcorn and a drink at the cinema, I am aware that my opportunity cost is a night’s accommodation in South-East Asia (The price of popcorn here is unbelievable).
That sobers me up a little and makes me wonder about how much I value the popcorn (or whatever it is I’m thinking of buying) in relation to my travel budget. The more I spend on things which don’t give me very high utility, the less I have to spend on travel, which gives me considerably higher utility. I ended up cutting my expenditure by more than half once I started considering my opportunity costs.
As cliché as the saying is, moderation is key
All that being said, don’t start starving yourself of simple pleasures. I still go to the movies, have a cup of coffee etc, but I keep it to a minimum. I’ve replaced many of these expensive hobbies with free activities that make me equally as happy, such as playing the guitar, hiking with friends or enjoying a great book while at the beach.
The point is, you don’t have to buy stuff to be happy. Only make your purchase if it enhances your overall experience or quality of life in a meaningful way, and if you go through the checklist and the item passes your criteria, go ahead and make your purchase with confidence.
A quick post today on my thoughts about why many people experience general down cycles in terms of happiness. This is different from depression, although the thoughts in this post could well be applicable to it.
My theory is that the sedentary lifestyle that most people live today has given rise to this issue of feeling unhappy all the time. It’s common knowledge that exercise makes you feel better, but I didn’t quite realise the impact it actually had on my quality of life until I started working out consistently.
I spent the majority of my university life in a state of constant unhappiness. Of course, there were ups and downs, but I’m talking about a general level of unhappiness. There were times when I would be feeling down for no apparent reason whatsoever. I never questioned this, and even thought it was normal. After all, why would you feel happy for no reason, right?
The 2-Week Experiment
At the start of summer, I decided to try a 2 week experiment. I changed my sleeping habit and started waking up at 6.30 every morning and going either for a bike ride or to the gym. At the end of every session, I would feel a natural high that allowed me to go through my day feeling relaxed and happy. I constantly felt lethargic, unmotivated and unhappy, but since I made this change, I’ve never felt better at any other point in my life.
In fact, I enjoyed the experiment so much that it’s become my daily routine. It’s pretty much an automatic process now, compared to before, when I would struggle to motivate myself just to go to the gym.
Working Out Provides the Natural High
Exercise is the secret to happiness. Or at least, it’s a big part of happiness. A potential reason for this is the release of endorphins into your system. Endorphins provide an effect similar to that of opiates – a euphoric feeling, or a natural high. This is the feeling you get after a solid workout session.
I’m sure everyone knows that exercise has been linked to a diminution of stress levels, better health, etc. Before I started the 2 week experiment, I severely underestimated the impact it would have on my quality of life, and working out was always an “option”. I no longer consider it an option. I use my workout as part of the scaffolding for my day.
Mental Health Issues
I think that if society led a more active lifestyle, it’s quite possible that there would be a significant reduction in mental health issues (I don’t know if research has gone into this, at this point it’s simply an opinion based on my own observations and experience). As part of my mental health training, I noticed that a common pattern to recovering from mental health problems was the “Trinity of Happiness” (I don’t think anyone actually calls it that, just me); exercise, nutrition and sleep.
People greatly underestimate the effect that these activities have on them and I think it’s a terrible shame. Part of the problem can be remedied with education, but as usual, this needs to come from within. The individual needs to be open to the idea and willing to try it out.
Essentially, if you work out consistently, you’ll be significantly happier.
Disclaimer: I am not professionally trained in psychology, and these ideas are simply for discussion purposes and to encourage further research.
- I think our society leads a lifestyle that makes us highly susceptible to feeling unhappy.
- My theory is that exercise could be the remedy for this.
- The post workout “high” can help you get through the day feeling relaxed and happier
- Exercise is very often underestimated (I would know, I underestimated it), and it has an incredible impact on quality of life
- Don’t make it an option, make working out a part of your lifestyle
Placing gummy bears or chocolates at the end of every paragraph of your textbook doesn’t quite cut it when it comes to motivating yourself for a heavy study session. For one thing, it’s not sustainable, not to mention terribly unhealthy. Motivation needs to be strong enough to push you through when you feel like giving up.
I have a couple of tricks up my sleeve when it comes to this. Let’s start with the first one:
Shorten Your Study Periods.
Haaaaaaaaallelujah! By shortening your study periods and increasing the frequency, it’s much easier to keep yourself motivated and maximise your concentration while you’re at it. The Pomodoro technique is literally the best tool I’ve found so far, and has gone a long way in helping me stay focused and highly motivated to study (I go into detail about the technique in this post).
Create Achievable Milestones
Goals or milestones are extremely powerful motivational tools. However, they need to be specific and measurable in order for them to work.
- Set macro and micro goals, and rewards to go along with them
Break up your study goals into smaller, achievable milestones. Start with macro goals. For example, “Within 4 weeks, I need to cover x amount of material.” Then switch over to your micro goals, which involves what you need to cover today or even in the next 2 hours.
The big question here is, how do you keep yourself motivated to achieve these goals?
This is the fun part. Set up rewards! You’ll need to set up small and large-scale rewards for this to work (you can apply this to anything, not just studying):
- Set up mini-rewards for everyday studying. In my case, I usually reward myself with 5 minutes of playing the guitar after a solid Pomodoro session, which lasts just 25 minutes. At the end of the day, perhaps you could reward yourself with a good movie, or hang out with friends.
- Next, set up a large reward that you can work towards. For me, I had worked over the summer and saved up enough cash to travel to New Zealand, so I made this my reward for working consistently throughout the semester. This had a powerful motivating effect, because each time I felt like giving up, knowing that I had something amazing to look forward to kept me going.
- Plan for your rewards, but hold yourself accountable. If you don’t hit your goal, don’t reward yourself.
Set up high stakes and leverage your fear of loss
Use the power of fear if rewards don’t work for you. People tend to work much harder in order to prevent losing something, compared to the amount of effort they would invest in order to gain something.
Tim Ferriss gives an example of this in one of his talks, but he used weight loss as an example. If you have trouble sticking to your goal of weight loss, take pictures of yourself in your underclothes and give them to someone you trust and tell them to post it on the internet if you don’t achieve your goal. This might sound extreme, but if you were in that position, you’d definitely find a way to lose that weight.
Of course, you don’t have to go to these lengths, but something similar could work. For example, if you can’t motivate yourself to study, you could give a sum of money to your parents and only ask for it to be returned if you achieve your goal, or else they could spend it on themselves.
- To motivate yourself use these tricks:
- Shorten your study sessions and increase the frequency. The Pomodoro technique is perfect for this.
- Set up mini-rewards for everyday study sessions and one large-scale reward to work towards.
- Mini rewards could include listening to music, an entertaining video, a healthy snack, etc. Larger rewards could be a road trip, a vacation, or something else that you really want. This is very important to keep you going.
- Use the power of fear. Setting up stakes can keep you motivated.
- If you make a bet, losing that bet could entail you having to do something embarrassing in public if you don’t achieve your goal for instance.
I’ve often wondered what separates the average from the phenomenal.
Why is it that certain people are able to achieve an elite status compared to the vast majority? I examined a multitude of individuals across various disciplines and tried to determine the common factors that could explain their success.
Factor #1: Discipline
Top performers all have one thing in common. The discipline to keep at it. No excuses, period.
I had the UFC on, and watching the way the two fighters moved, it wasn’t hard to see the years of practice that would have gone into their art. Every jab, perfected only after hundreds of thousands of strikes on a punching bag, hours of grappling practice on a mat, the strict but essential diets, and endurance training for days on end.
Applying this to ourselves, discipline is one of the toughest things to master. The key, however, is to block out a time for whatever it is you need to do. For instance, I never stuck to my bike rides because I would only go whenever I felt like it and it was easy to blow it off. After I blocked out 7.15 – 9am every day specifically for that purpose, it became very easy to stick to it. If you don’t do this, it’s deceptively easy to say:
“Oh well, I have plans now. Guess I’ll just do this another time”.
Having a set time for working out or studying, etc, will allow you to plan your day around it rather than over it and skipping it altogether.
This was and still is one of the toughest obstacles for me; finding the discipline to keep working even when you don’t want to. Something I realised is that if you have intrinsic motivation, discipline comes easily. However, if you don’t have this (usually because it’s something you have to do rather than want to do), you need to find some form of extrinsic motivation. If you want to be able to achieve something, it’s going to depend on how badly you want it.
With things like studying, intrinsic motivation is very hard to find unless you love your subjects. In this case, what you can do is to set up external stakes which I will get into in another post, but for now I’ll provide a brief example:
Hold Yourself Accountable by Making a Bet
- If you lose the bet – meaning that you didn’t achieve your goal – you’d have to go out in public and do something highly embarrassing. Your friend would have to be someone who would hold you accountable for this to work. Tim Ferriss talks about this in one of his interviews, and I believe he called it “fear-setting”. People tend to work much harder if they had something to lose, than they would work in order to gain something.
Factor #2: Loving what they do
Perhaps, the more important of the two factors, I initially thought that this was pretty self-explanatory, but then I realised that perhaps it’s not as simple as it sounds. The thing is, there is a difference between becoming “good” at something and being phenomenal.
That difference is loving what they do almost to the point of (healthy) obsession. To illustrate this, John Mayer’s parents took him to a psychiatrist because they thought he was far too obsessed with the guitar. However, he was deemed to be completely healthy. It was simply his passion for the instrument that drove him to become phenomenal.
I’ve noticed that in many biographies of top-level performers, most of them were almost if not completely obsessed with their skill or sport, be it chess, swimming, culinary arts, acting etc. They didn’t just “like” doing it. To me, that’s what you’d call a hobby. Loving what you do with an undying passion is the difference that will set you apart from the average.
This is where all of the greats put in at least 10 000 hours of practice in order to master or perfect their skill. This is different from the 20 hours it takes to become good at any skill . This involves complete mastery, and takes much longer than 20 hours.
If you want to become world class at anything, you need to find something you truly love. If you don’t know what that is, you can attempt new things until you find something that simply clicks, and once it happens, you’ll know it beyond any doubt.
- The two factors which separate the great from the average are self-discipline and loving what they do.
- Discipline comes from setting a block of time to practice your skill and sticking to it.
- Intrinsic motivation makes sticking to the routine easy, if you don’t have this, find extrinsic motivation. For example, set up stakes that will keep you motivated.
- People tend to work harder if they have something to lose, compared to the effort they would put in to gain something. Keep this in mind when setting up stakes.
- Most world-class athletes, musicians, actors, etc are almost obsessed with their skill. This is perhaps the most important difference between the average and the phenomenal.
- Liking what you do is something I consider a “hobby” while an undying passion for what you do is what sets you apart.