Compounding - Mental Model
Real progress is the accumulation of your efforts.
It's 2022, and I’m at the finish line of my first half-marathon. What got me here wasn’t talent or just my motivation. It was the compounding effect, the real physical progress. After running four times a week for over two years, I can say my health has never been better.
The compounding effect creates more progress than we could have predicted.
Our perception is tricked by the seemingly overnight success we see from others. But this overnight success is an illusion — it takes consistent effort to achieve the desired results.
Compounding is visible:
Inflation: 10% annual inflation over 7 years nearly doubles prices.
Biology: The human body grows from a single cell to tens of trillions of cells in just 9 months.
Running: With consistency, someone can go from couch to marathon in 6 months — it's not easy, but possible.
The key is accumulation. Getting a little better, a little stronger, a little smarter. Then time does its part.
The Math Behind Compounding
There is an often-quoted equation which illustrates compounding — getting 1% better every day for 365 days:
James Clear, author of Atomic Habits, points out that systems around getting slightly better every day are much more important than one-shot goals.
I’m not a big fan of the “1% better every day” idea, because it’s hard to know what that really means in daily life. It’s not clear if we’ve improved at all. And over time, we often fall into regression towards the mean.
Progress doesn’t happen in a straight line. It builds up slowly, and we don’t always notice it straight away.
Example Areas Where Compounding Works
"Play iterated games.
All the returns in life, whether in wealth, relationships, or knowledge, come from compound interest."
— Naval Ravikant
Networking: The more people you know, the more future opportunities you can unlock. And that network of connections grows on its own.
Health: The healthier you are, the more it helps with your energy, focus, confidence, and ability to deal with challenges.
Decision-making: The more experiences you have, the better you get at thinking carefully and making good decisions.
Learning: The more you know the easier it becomes to understand new things, patterns from other domains can help you understand ideas more deeply and apply them across different areas.
The Trap — Bankruptcy Moments
Compounding isn’t always positive. It works both ways.
If you make just one huge mistake — with money, your personal life, or something else — it can take away all the progress you’ve made. And you are back to square one.
One bad choice can undo everything. It’s just as important to avoid big problems as it is to try and grow.
Summary
“Compound interest is the eighth wonder of the world.
He who understands it, earns it; he who doesn’t, pays it.”
— attributed to Albert Einstein (but not confirmed)
Compounding is powerful. But it’s a double-edged sword. It can work for you or against you.
Think for a while:
Where in your life are you already seeing the effects of compounding?
How can you be more intentional about using it?
And where might you be falling into its negative side?
Thanks for reading!
— Michał
I also discovered the “1% better every day” when I read Atomic Habits. It's true it's hard to quantify in real life. I think about for some things that can easily be measured in such way, like the number of subscribers for example, e.g. Am I growing at least 1% at day?
But yes, compounding is powerful and is there for every aspect of our lives. I enjoyed the insightful post.
Great post! we’ve seen the 1% better math but what does the output (37) mean? never quite grasped that