Forget the balance, focus on deposits

“Habits are the compound interest of self-improvement” - James Clear. From the moment I read that sentence, I knew that I had come across a tantalizing axiom for life.

Why should we care about compound interest?

Compound interest is one of the most powerful forces in existence, but it’s hard to harness because it involves math and time, two things most of us don’t have patience for.

To illustrate, take the following example from personal finance. Don’t worry, this is the only part of the article with numbers and math.

Assuming a 10% annual rate of return (the 30 year market average is 12%), someone making $30,000 a year can retire with nearly two million dollars by investing 15% of their monthly paycheck ($375) in the stock market, over a period of 40 years. It’s so reliable and proven that it’s the backbone of nearly all retirement plans in the United States.

Think about that. This person would have kicked in a total of $180,000. The other 90% is all compound growth that didn’t require them to lift a finger. That’s a hell of a lot of gravy.

Whether we know it or not, we’re interacting with compound interest all the time. It just comes down to which side of it you’re on. The example above shows what it’s like when it’s working for you. Most of the time however, we’re on the short end of the stick.

If you pay a mortgage, credit card, student loan, or any loan that charges interest, the interest fees you pay every month compound into your creditor’s gravy. Entire industries, flush with cash, are built on the power of compound interest.

We can be a beneficiary too

Clear’s insight is a triumph because it shows how the awesome power of compound interest is available to regular people like you and me.

I’ve experienced this first hand with running. By consistently completing short runs, my running capacity has experienced compound growth over a period of about four months. At first, I struggled to run 3 miles a week. I now effortlessly run 12. Effortless is the operative word here. While the distance has grown linearly, increased pace, lower heart rate, and improved form have all compounded to make the distance easy.

I’ve also seen it play out in my cooking. Five years ago, I didn’t really know how to cut an onion. Now, I can whip up a meal just by looking at what’s in my pantry. The ease with which I make a meal illustrates how accumulated knowledge about how flavors go together, what’s too much salt, how to sharpen a knife, and how to prepare starches, have all compounded over time to make me proficient and at ease in the kitchen.

Each meal I prepared amounted to making a deposit in my Cooking Knowledge account, and with enough consistency and time, that account experienced compound growth. Similarly, each completed run registered a deposit in my Running Capacity account.

Pick your identities and figure out your deposits

The choice of which “life accounts” to invest in were highly informed by my desire to identify as a consistent runner. Avoiding injuries and reframing my motivations for running helped me determine that Running Capacity and Cooking Knowledge were the accounts I needed to focus on. Once you determine which accounts to invest in, the next step is to figure out what your deposits are.

In the case of running, the deposit is made when the run is complete. Talking or reading about running is helpful, but running itself is the only thing that translates into improved ability. So that’s the currency of running deposits.

Cooking is a bit more tricky. In order to cook the food, you have to have the ingredients. So my Cooking Knowledge account actually requires two kinds of deposits: cooking a meal and trips to the grocery store.

Compound interest only manifests when consistent deposits are made over time. While there isn’t much we can do about time, deposits are 100% within our control, and the keys to making consistent deposits are planning and tracking.

Make time

Show me what your calendar looks like and I’ll tell you what your priorities are. Scheduling time to make deposits severely reduces the likelihood that they’ll get crowded out by competing priorities as the day unfolds. If I end up ‘missing an appointment’ because I slept in and missed my 7am running deposit, then I make sure to reschedule that time to later in the day. I take my calendar seriously, and only book time for events that I absolutely intend to see through.

Track your deposits

My consistency in making deposits is directly tied to how well I track them, and for this task, a habit tracker is precisely the right tool for the job. Compared to a typical task management app, habit trackers tend to be lightweight, low friction, and most importantly, they visualize success with a calendar view. I’ve been a fan of Habitify. If software’s not your thing, a paper calendar with an X through each day works well too.

Don’t miss twice

To pull another James Clear quote: “One mistake is just an outlier. Two mistakes is the beginning of a pattern.” I’ve found this to be tremendous advice, and it has given me the ability to grant myself grace in moments when life gets out of hand. It’s simply not reasonable to assume you’ll be perfect in making your deposits, but as long as you don’t miss twice, you’ll be able to get back on the horse and keep up the momentum over the long run. Even as a worst case scenario, getting in 50% of your deposits, and carrying on, is far better than quitting.

Win the day

Each morning, as I look out to the next 24 hours, I now ask myself “which deposits do I need to make for today to be a win?” This framing helps me balance the deposits I don’t want to miss against everyone else’s requests of my time and attention. In this way, I can protect my interests from getting pushed to the back burner by competing demands.

Conclusion

I’ve found this deposit-centric view of the world to be fun and highly effective, while still being simple and sustainable. Making compound interest work for you is a superpower that’s available to all of us.

By determining which of your ‘life accounts’ ought to be set up for compound interest, you can think through what the deposits are and how best to make them. Give those deposits a VIP seat to your calendar, and chalk up the wins with a habit tracker, and you get a great recipe for making any each day a win.