The compound effect is based on the principle that each decision helps shape your destiny. Little, everyday decisions can either take you to the life you desire or to disaster. The decision to save a small amount of money, like $3 a day, may not seem like a life changing decision. After all, what can you get for $3 nowadays? A happy meal, a cheap tee shirt (maybe), or a cup of coffee from your favorite drive-thru. However, making the decision to consistently save $3 a day, seven days a week, can result in significant savings over time. The simple act of brewing a cup of coffee at home instead of buying one to go from a coffee vendor can save at least $3 a day, more if you like coffee with all the bells and whistles. Not only will you be $3 richer today, by the end of the week you’ll be $21 richer, by the end of the month you’ll have saved $90, and a year’s worth of this money-saving habit will result in a whopping $1,095!
Have you thought about investing, but wondered if it were truly worth investing a small amount? If you have thought you needed a huge lump sum to enter the investment world, it may surprise you to learn that if you take that $3 you’re saving every day and invest it at 7%, it will be worth $165,589.42 in 35 years. Let that sink in for a moment. So maybe not tomorrow, but over time changing just that one small habit (daily coffee to go) and consistently saving the money you would have spent could result in an extremely cushy retirement fund. Just imagine what you could do with $165,589.42. Wipe out credit card debt. Pay off student loans. Buy the car you really want. Take the entire family on an extravagant vacation and pay cash for everything. Pay off your mortgage, or sell your house, add those savings to the proceeds, and move anywhere you want. The possibilities are endless.
The truth is, if you start with an amount as small as just $3 per day, once you see the balance of your savings account begin to grow you’ll be inspired to find other ways to save. The compound effect of one sound financial decision will soon lead to other savvy decisions. You’ll discover that if you have the discipline to make coffee at home instead of paying someone else to do it, you also have the discipline to eat at home one or two weekends a month instead of dining out. That could result in an extra $100 every month, which when added to your “coffee savings” will increase your savings balance at an impressive rate. Instead of dropping $50 or more for a night at the movies, a $1 rental and microwaved popcorn will become suddenly more attractive than ever before. Snagging leftovers for lunch can save you as much as $25 to $50 every week, adding up to $1,300 to $2,600 over the course of a year. Those are sizeable amounts, and with every dollar you save your peace of mind grows. Putting away an emergency fund is suddenly doable. Paying cash for a car, boat, or other major expense instead of adding another monthly bill to the pile becomes a reality. Planning a trip to visit relatives for the summer or Christmas holiday is no longer impossible. Surprising your partner with a 5-star weekend getaway won’t be a fantasy anymore. It’s amazing how your thinking will change when you suddenly realize you have discretionary funds at your disposal to spend however you see fit.
Understanding how the compound effect works with money will soon spill over into other areas of life, as well. You’ll begin to evaluate your schedule at home and work and realize that carving out just a few minutes a day to do something that adds value to your life will soon grow into hours every month, and the benefits will be incalculable. That book you’ve been meaning to read, the skill you’ve been wanting to learn, that person you need to spend time with will move from the realm of “I wish I could” to “I’m so glad I did”. That $3 worth of change sitting on your dresser just became an agent for change, and that realization is priceless.