“Improve by 1% a day, and in just 70 days, you’re twice as good.”
Alan Weiss
This week, I’ll discuss a concept I learned during my MBA studies: compounding. Though widely known, it’s worth revisiting. Compounding is the process of turning money into more money through strategic investments.
To illustrate this concept, let’s consider the stock market, which offers a prime example. When investing in stocks, investors often receive dividends as a reward. Some may choose to spend these dividends on personal expenses, such as dining out. However, the principle of compounding encourages reinvesting those dividends back into the stock market.
Suppose you have a comfortable lifestyle and don’t require additional income from your investments. In that case, compounding can significantly increase your net worth over time. It’s important to note that stocks represent net worth rather than liquid cash.The process involves reinvesting any returns, be it a large or small sum, back into the market. As the value of your investments increases, so do your returns. By continuously reinvesting these returns, your wealth will grow exponentially.
And Here’s a fun little visual I made on compounding.
That concludes this week’s discussion on compounding.
Read the original from Josh Kaufman here: https://personalmba.com/compounding/
Stay tuned for more insights next week.