Magic of Compounding: To learning compounding of money, you got to apply it


When we start to learn, we are essentially thrown into a system of learning. Starting with primary school, we learn the alphabet in many languages, then understand the structure of language, to build thoughts and to build sentences to convey complex thoughts.

We top this up with several functional concepts like mathematics, science and social sciences. Each of these add-ons is essential to help us acquaint with a sense of the history of that topic and how our modern society came into existence. We get to learn where these ideas came from.

In the same way, when we complete this process of systemic education, school > under graduation > post-graduation and so on, we end up being thrown into an existing economic system as an employee. Even being an entrepreneur is becoming a part of an existing economic system. No one, at this stage, is re-inventing anything.

We start with some basics like how to make money, how to store it (financial investments), how to use it to create productive assets and how to spend it (consumption). It becomes easy after a while, because we start to embrace this system as a natural way of doing things. Since we were born into it or thrown into it, we accept it as a fundamental law of nature.

Imagine being thrown into a swimming pool and we start to splash our arms and legs to stay afloat. Eventually, we learn to swim and understand how to stay buoyant by learning the techniques of swimming. In the same way, we learn how to live with the way the flow of money works.

I wish it were that easy to describe the process of learning about money. It is not as easy as learning a few strokes of swimming. Many of us go through lives not knowing how money works, yet a large part of the mental effort goes into generating an income. Much of the blame lies on us, as individuals who do not put in the effort to learn about it despite having sophisticated tools like online search and millions of hours of audio/video/text content on the topic.

Another reason for this lack of understanding is the way these concepts are communicated, not exactly easy to absorb, which make us feel dumb.

Imagine if our swimming instructor used the terms like ‘bilateral breathing’ or ‘body roll’ and expect us to understand them while we are trying to stay afloat. In due course, we will learn to swim and we will learn the terms followed by the actions.

In the same way, the person thrown into the economic system cannot understand concepts like fractional reserve banking or inflation or compounding of wealth and so on. These concepts need to be applied while we learn.

That is why it is important to have a sense of the history of the things around us.

What is money? What is investing that money? What are the different investment products? Can we go back to our high school textbooks and understand how simple interest and compound interest work? If we have forgotten, can we re-educate ourselves on these concepts?

Why is it important to learn this? In swimming, you can swim for your entire life without learning the term bilateral breathing and still enjoy a good dip. You may rely on a swimming coach in the beginning, but eventually, you must get in the water and move your arms and legs yourself to stay afloat.

While investing our money, it is good to get advice when it is hard to understand and we must also make an effort to learn what’s going on. Unlike swimming, things are not as simple in the world of money. It is the responsibility of the provider of an investment product to make the product simple and easy to understand to keep communicating the pros & cons of investing in it and provide timely updates to their investment process.



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