We see how compound interest applies to money and investing. But it applies to much more than that. Let’s take business for example.
When we begin in business, we don’t know a lot about how to do it; at least the we don’t know things “emotionally” like we do when we makes mistakes ourselves – we never forget. As we make mistakes, we invest the past into the future; smarter, not making those mistakes again.
When we begin, we have few employees who know what they are doing and are experienced. We have to invest in their education with training, paying for their mistakes, and enduring the months of lower productivity while they learn to do their jobs really well. Some employees are not the right ones and it may take us a long time to replace them and get the right ones.
When we begin we have few connections and our network is small. Maybe some vendors and advisors we rely on are the wrong ones. It takes time to find the right ones.
When we begin we have little working capital – cash, receivables, and fixed assets like equipment and our facility.
Over time we get more and more of these things right. It begins to pay off, and we realize greater and greater productivity with less effort than before because we are levering benefits of knowledge, actions and resources we worked to build in the past. We experience compound interest in our business.
An entrepreneur spends the first part of his/her career being desperately underpaid so that IF they get it right, they can spend the latter part of their career being wildly overpaid.
Of course, you have to get things right. You can’t keep making the same mistakes, and you can’t advance most years only to take big steps backwards some years with big mistakes. When you are finally “wildly overpaid”, it is the just payment for all the years of assembling the business when there was no financial reward in that taxable year.
Do you think “the hockey stick” of compound interest is coming in your business?