The Power of Compound Interest Outside of Economics

I wasn’t naturally a good basketball player.

I didn’t start playing the sport until 5th grade, and I made my 7th grade basketball team by a razor’s margin.

Yet I was able to develop into one of the best players in my county by my senior year of high school.

And by that time, a significant gap had opened up between my play and the ability of the other students who had been so similar on the court back in 7th grade.

Why was that?

Perhaps it’s easiest to explain by first covering a topic from economics – compound interest.

I know this isn’t a particularly novel idea, but bear with me.

If you haven’t heard of compounded interest, it’s effectively the idea that you earn interest on top of the interest that your investment has previously earned.

For an example, say you place $1,000 in a savings account that provides 10% return. If your interest wasn’t compounded, you would earn 10% x $1,000 = $100 in interest each year, and after 30 years your account would be worth $1,000 + 30 x $100 = $4,000.

Not a bad return.

But look at what happens when your interest is compounded.

Rather than just making $100 in interest each year, you actually make 10% of the total value of the account every year.

So in the first year, you make $100, and end the year with $1,100 (same as before).

But now in the second year, the interest you earn is actually 10% of $1,100, or $110. That leaves you with $1,210 after the second year rather than the $1,200 you would’ve had if the interest wasn’t compounded.

The math isn’t really that important here so I’ll skip the intermediate steps, but the punch line is that this seemingly insignificant change ends up being huge in the long run.

In an account with compounded interest and 10% yearly returns, you’ll actually end up with $15,863 by the end of Year 30.

When comparing that to the $4,000 you would have without compound interest, it’s obvious that the impact is substantial.

 

You might be wondering how this relates back to my experience playing basketball.

Thinking back to my 7th grade tryout, I was marginally better than the last kid who was cut from the team. It was really splitting hairs at that point.

So it might be natural to assume that was the case every year.

But that’s not at all what happened.

By the time tryouts came around the next year, I had put some separation between myself and the players on the end of the bench.

The next year it was even more significant, and by the time I hit high school it was night and day.

So the obvious question becomes why.

Why did what started as such a small gap open so widely over time?

Again, the easiest way to explain this phenomonen is with compounded interest.

The effort that I put in during 7th grade was just enough to make the team.

But throughout the year, I continued to progress. By the half way point in the season, I had earned a regular rotation with the starters, and by the end of the year, I rarely left the court during games.

The effect was only magnified the next year.

As I worked to get better, I earned more play time and I was exposed to more challenging situations that forced me to further develop. Which then gave me even more opportunities, and so on.

By the time that I hit high school, I had maintained such a steep learning curve that I progressed well beyond most of the other players who had been stuck sitting on the bench year after year.

Obviously this isn’t a hard and fast rule because there are plenty of examples of late-bloomers, and athletes who peak early only to let the rest of their competition catch up with them over time.

But as a general principle, earning playing time early on grants you opportunities to improve that only make it easier to earn more opportunities in the future.

And I’ve seen this same principle apply to my career as well.

When I started my first job, I worked just hard enough and was just opportunistic enough to be put on a high-profile project after just a few months.

I wasn’t necessarily qualified for the job, and I’m sure there were plenty of other people could’ve been good candidates to lead the effort. But the opportunity effectively fell into my lap because no one else wanted it.

At the time, I didn’t think much of it. It just seemed like ordinary work.

But over time, this project became a stepping stone for me. Because of the nature of the work, and the impact that it had on Boeing as a whole, I got opportunities to present to people that a typical entry-level engineer rarely even gets to meet (including the CEO of the entire company).

Through these experiences, I learned and developed at a rate that I couldn’t have previously imagined.

And after just a few months, I got to the point that I had learned so much that I actually developed to a level that made me without a doubt the right person to lead the project.

It was curious how it happened given that I almost accidentally grew from a timid new hire to a confident project lead, but it goes to show how powerful situations can be if you’re able to take advantage of the learning opportunities that come with them.

They don’t necessarily come often, but when you can find the right opportunity that exposes you to situations that force you to grow, the effect can be monumental.

So when I’m trying to think about the next steps in my career, and my personal life, I often look for development opportunities more than anything because I know that any skills that I can learn now will only make it easier to find better opportunities in the future.

And so the compound interest cycle goes on.

-Brandon

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