Big goals can be both daunting and overwhelming.
We know what the end goal is, and we know what we need to do to get there…but it’s so far off in the distance that goal seems practically unattainable.
Take paying off the mortgage. 30 years is a loooong time to be paying off a debt.
But little by little we get there with two four key ingredients:
- Small steps
The Power of Compounding
This question is an oldie but a goodie: Which would you take: $1 million dollars straight in the hand OR 1 cent, doubled every day for a month?
You know this is a trick question, so you’ll probably take the 1 cent, which would be the correct answer.
In fact, you could beat that million dollars tenfold, assuming you picked the right month (not February!).
Here’s how the maths unfolds:
Yeah, I know, back in the real world, we’re never going to find an investment that doubles our money every day.
But what this example does show is how compounding works and how it’s important to ‘run the numbers‘ not just make a decision based on face value.
Take a look at the first few weeks. Not much happening there, folks. Nothing to see.
That’s why it can feel like you’re getting nowhere when you’re taking small steps towards your financial goals.
But then, halfway through the month, things start to really gain momentum. The power of compounding kicks in.
And by the end of the month, our 1 cent investment has outstripped the $1 ten million times over.
But you need all the players: small change, time, consistency and compounding to see the result.
How one soft drink can save you $30,000
Let’s say you have a $3 a day soft drink habit (weekdays only) that you want to redirect to your mortgage. Before I get into the maths of how this seemingly small amount can save you a packet of money, let’s look at a variation of the compounding effect of not drinking that soft drink each day.
A can of cola beverage (insert your favourite trademarked beverage here), is about 138 calories. 1 can less a day gives you a 2,760 calorie deficit each month.
Over the course of a year, wait for it, you consume 33,120 calories less by cutting out just one can of soft drink a day.
In financial terms, that adds up to not spending $720 a year.
Now let’s see what happens if you were to put this $3 to your mortgage instead of just saving it.
Just say you have a mortgage that looks something like this:
Now here’s the effect of paying an extra $60 per month ($3 x 5 days x 4 weeks) assuming all things equal and interest doesn’t fluctuate etc. (it’s never like that in real life, but we’ll assume it here for the sake of the maths):
It’s not $10 million dollars, but it’s still pretty impressive for one small change.
From little things, big things grow as they say, or small changes make a big difference. What small change are you going to make today?