Who’d have thought that economics and productivity have so much in common! I’ve researched and written two articles recently and the concepts and themes link right back to economics.

The first was to do with procrastination and the principle of time inconsistency (also known as dynamic inconsistency) and how that applies to the way our brain works. You can read more about that principle in my article on why we procrastinate.

The other is related to today’s post on the compound effect and the impact the compound effect has on us living better lives.

What is the compound effect?

Most of you should be familiar with the compound effect. In economic terms what it refers to the increasing value of an asset due to the interest earned on both a principal and accumulated interest. If you save $100 at 5% interest, by the end of the year you have $105. The next year your 5% interest calculates on your $105 principal so by the end of the year you have $110.25 and so on and so on. If you add additional savings to this each year, the impact of compounding is even bigger.

That’s how it applies to finance, so how does it apply to our lives? A lot of small, little things, every day are what make the difference. It’s the small, seemingly unimportant, uneventful and insignificant decisions we make daily that determine what our future will be like.

Darren Hardy wrote a great book called, funnily enough, The Compound Effect. The compound effect is the strategy of reaping huge rewards from small, seemingly insignificant actions. It’s a fantastic book which I’ll review in another article but for now, let’s look at how to apply the compound effect.

How to apply the compound effect?

It is what we choose to do daily that makes the biggest difference. Too often we default our choice to our habits or what’s easiest. We don’t even realise we are making a choice, it happens by default and guess what the older your habits, the deeper their roots and the harder it is to notice we are even doing them.

A chocolate biscuit you have every afternoon with your coffee is an insignificant decision and doesn’t have much impact at all. But what would happen if you cut that biscuit out? You would eat almost 35,000 less calories in a year!! That’s phenomenal when you think of it like that. Rather than default and reach for the biscuit, choose not to have it and the impact of that small daily choice will be 35,000 calories!

What would happen if you did just a little bit of cleaning each day – perhaps a couple of windows or disinfect the bathroom sink – over the course of the week your housework could be done without you having to set aside hours of your weekend to do it.
Do you have an exercise goal you want to reach? I do, this year it’s three body weight pull-ups. I used to be able to do them, but I injured my shoulder a year ago and haven’t done them for a year. My shoulder is OK now but I can no longer do a pull-up. I could avoid them and complain about how hard they are. Instead I’ve decided to do something small every day until I can reach my goal.

Do you want to start a side business? What small, little insignificant things are you doing each day to move towards that.
Do you want a better relationship with your partner? What is one small, little thing you can start doing each day to improve the relationship? Is it just telling them you love them? That they look nice? Ask how their day is? Thank them for something? I could go on and on and the reason is because the concept is so simple.

I’ll write more about this in coming articles and review Darren Hardy’s book, The Compound Effect but for now, I want you to think about how you can apply the compound effect to your life. What small decisions can you make each day that will lead you towards a better life? What small changes can you make that over time will have a bit impact?

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