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Using the Principle of Compound Effect as a Strategy for Financial Freedom

By Edited Nov 13, 2013 0 0

Have you ever wondered why the time tested principle of compound effect has continued to be effective up till today? If you have ever struggled to accumulate wealth just like me you will appreciate the benefits of this wonderful principle when it is delivered to you in its simple form. I came to learn about the benefits a few years ago and I have found out that if applied diligently, it could be used to make realistic wealth building plans. You can use it to build wealth and be financially free for the rest of your life. This is however for those who still have age at their advantage.  The principle could also be used to make realistic financial targets. Anybody could do this no matter the age of the person that is applying the principle.

What is Compound Effect?

Compound effect is the principle of earning large rewards from series of small smart choices an individual must have made in his life. The result of these rewards might be huge, but the steps taken to achieve them might not seem important. The principle could be used to make changes in just about anything. It could be used to make changes in health & fitness. It could be used to make changes in relationships. It could be used to make changes in knowledge. It is also used to make changes in income which is the subject of this article.

Small smart choices + consistency + time = Radical changes

The power of the principle lies in its simplicity and its success lies in the result of the small smart choices completed consistently over time. However, the most challenging aspect of the principle is that you will keep working away consistently and efficiently for a while before you begin to see the result. A very successful and wealthy businessman today for example must have gone through denials, bone crushing financial discipline, sleepless nights and hours upon hours of planning and implementation of the plans to make the business successful. He must have gone through sheer agony, frustration, failure, loneliness, disappointment and hard work to become successful in his profession.

How Can You Apply the Principle of Compound Effect to Attain Financial Freedom?

The following steps are the ones any aspiring person should take to use compound effect as an effective strategy to attain financial freedom:

  1. You should cultivate the habit of saving:  Every dollar you safe is a money seed. Just like the tiny acorn seed which contains the seed that grows into the mighty oak tree, each dollar you safe and is untouched possess the power to grow into a mighty money tree. This money tree if allowed to grow into one can produce fruits twenty four hours a day. It will produce money while you sleep. It will produce money while you work. It will produce money while you play. It will even produce money while you eat. It never stops producing money.
  2. Avoid wastage of each dollar earned: If you destroy an acorn, the potential tree inside it dies. Likewise, every time you waste a dollar bill, you are wasting a potential money tree. It is therefore imperative that you protect each of your money seed. Every time you save each one of those money seeds you start sowing your way to wealth.
  3. Allow the money you save to multiply: If you save a single dollar using the principle of compound effect how long will it take the single dollar to turn into a million? Using various interest rates, the table below shows the number of years it will take:

Interest Rate

Time in Years














 However suppose you save a dollar day using the same principle, how much would you have accumulated by the time you are 66 years and you might have retired from active work? Using various interest rates the table below explains this:

Interest Rates

Time in Years











The power of compound effect makes the saving of a few dollars a day to grow into enormous amount of money. However if you cannot wait until 66 years, you could plant more than one seed by increasing the amount of money you save. Depending on the amount of money you earn or make. After saving, you also need to invest what you have saved. It could be through mutual trust. It could be through investment in real estate. It could be through investment in stock. You however need the advice of the professionals.

4. Consistency: The key to the effectiveness of this principle is to keep saving. You should consistently save the dollar to achieve your goal of financial freedom. As you save, you should invest. It might be boring and dull initially but just continue doing it. The amount of money you invest is not as important as the consistency in investing that amount of money over a long period of time. Therefore do it regularly.

5. Discipline: The truth is that we all could have been millionaires, but most of us lack the financial discipline to make small daily deposits of money over a long period of time. We lack the discipline to defer our gratifications for a while forgetting that this is the only means through which our money tree could grow. Besides, we often procrastinate in taking action in our bid to achieve financial freedom.

If you could afford to master the principle of compound effect and apply it in your daily life, achieving financial freedom even before your retirement age will be possible. Your path to success in your bid to achieve financial freedom is usually a continuum of mundane, unexciting and sometimes difficult daily disciplines. The result is the lifestyle of your dream which could be yours when you put the principle into effect to work for you.



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