Compounding’s Effect on Life

My last few columns have been about the effect of compounding interest, either how it creates a virtuous cycle of wealth creation or a vicious cycle of choking debt. This column is about compounding, but in ways that aren’t necessarily financial in nature.

We’ve all heard the expression “if you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.” The single time spent teaching the man to fish is compounded over and over through a lifetime of benefit. Let’s consider what “giving a fish” or “teaching to fish” translates to in a few other contexts. Lets assume “giving a fish” costs $1,000 a month for an unemployed person, and retraining — teaching to fish — costs $2,000 for a semester’s program at a community college. The person needs to eat while retraining, so the total cost to “teach” is $6,000 for four months. The total cost to “give” for four months is $4,000.

What happens after the four-month period? Now the individual is retrained and employed in a new job. Not only does he or she not need to be given anything, but he or she is possibly paying some taxes — at least payroll taxes. The person who was only given a fish still needs to be given a fish every month after the four-month period ends. This expense could result in tens of thousands, perhaps, hundreds of thousands of dollars depending on the amount — unemployment payment, food stamps, health care etc. — and duration of the giving.

Lets next consider a church that is facing a budget crisis. Assume a church has a $4,000 shortfall to pay its bills over the next year. The equivalent of “giving a fish” would be to hold some type of fundraiser — a bake sale, a yard sale, a car wash, a plate sale to make up for the shortfall. What is the equivalent of “teaching to fish?” What would bring compounding into effect? The solution would be something that paid off over and over again, such as recruiting one or more new members who become contributors.

What are the costs? If a church has a plate sale, assume the combined number of hours worked by all of the church members is 200. What if those 200 hours were put to use in “teaching to fish?” Could those 200 hours be spent recruiting members that would result in additional contributors who would give $4,000? If so, and if those members stay in the church, they will likely keep giving every year while they are members. The additional benefit in this case is that the 200 hours would be spent on evangelizing, which is part of the church’s mission. Selling tickets and preparing meals for sale is probably tangential to a church’s mission. Moreover, nothing has been done to prevent a $4,000 shortfall each year thereafter.

The final context we will explore is social networking. Years ago, there was a Faberge shampoo commercial in which one woman who loved the shampoo said she told two friends, who each told two friends, who each told two friends, and so on, and so on. If this chain extends 10 times, guess how many women will hear about the shampoo — more than 1,000.

You may have heard of the legend where an emperor wanted to reward someone for doing something wonderful.

“Please name your reward,” the emperor said.

The man responded, “All I would like is one grain of rice, and then double that amount each day for the number of squares on a checkerboard.”

The emperor was astonished at this seemingly modest request, and quickly agreed. The emperor’s treasurer reported to him, though, that on the 64th day, the man was now entitled to more rice than could be produced on the entire planet in centuries.

The modern day expression for this same phenomenon is “going viral.” A certain email message comes to us and we find it clever enough that we send it to several friends. They find it clever enough that they each send it to several friends and the compounding is launched and in effect. What compounding do you want to launch in your life?

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