The Power of Compounding works in such an unassuming way that you never really notice it. The rich knows it's there and they always make sure it works in their favor. Most of us could trip over it and not notice it's there. The best way to understand the power of compounding is by an extreme example.
Let's say you play golf and you just walked into an ex-college mate, John, whom you have not seen in years. John used to compete with you in athletics. You both decided on a round of 18 hole golf together. John suggested that to keep the competitive spirit burning, you'll both have some fun and set up some form of challenge. And this is how it will go; for the first hole, the bet is 10cents and for every hole thereafter, the bet doubles. So you play 10 cents for the first hole, 20 cents for the second, 40 cents for the third and 80cents for the forth hole etc... until the 18 hole. You've heard that John is pretty good at golf but you probably won't be too far behind. Will you take up the challenge?
Well, you better think carefully because if you were to lose every hole, how much do you reckon you will lose? I've asked this question several times and the reply was always something like that, "... maybe about 50 to 100 bucks?" Well think again and this time, pull out that trusty old calculator. How much did it work out to? Yes... $13,107! You'd have gone back a lot poorer if you had lost every hole in that game! And such is how compounding works in real life too.
Where do you see them? Well, you see compounding at work in Credit Card bills if you've never paid them in full. Those of you who've chalked up credit card bills by paying the minimum sum each month will know what I mean.
On the positive side, you see compounding at work in investments. Warren Buffet is an extreme example of compounding at work. Warren Buffet buys up stocks but seldom ever sells them. Today his company Berkshire Hathaway is one of the most well managed and sought after company in the world. He became the second richest man in America mostly through the power of compounding. A few years back, I remember reading the story of a lady who put aside a small sum of money to buy Coca Cola shares every month for 30 years. She died a multi-millionaire!
So you think compounding only works on finance? No! It works in your everyday life too. Let's take a look at an example of an average salesman, Joe. Let's say Joe makes an average of 3 sales call a day, works a five day week and has a hit rate of 25% and the average order size is $10k. With these figures and a 20 day work month, Joe racks up sales of $150,000 a month. Assume that Joe gets paid a commission of 5%, he takes home about $7,500 in commission each month.
How does average Joe become a super sales person? Most would think he has to double his effort in everything he does. But this really isn't the case.
Let's say Joe increases his number of sales calls per day to 4 instead of 3. Sometimes, all this takes is for Joe to make one more sales call at the end of the day instead of heading back to the office or home. Let's say he also increases his closing ratio from 25% to 30% by refining his closing skills. Finally, Joe increases his average order size from $10,000 to $12,000 by up-selling. With these alone, a quick calculation will reveal that Joe would achieve a total sale of $288,000 per month and a commission of $14,400, almost a 100% increase! This is the power of compounding!
Another good example of the use of compounding is McDonalds. McDonalds in Singapore never used to open their stores past midnight. Today McDonalds increase their "Number of Sales Calls" by opening their stores 24hours. They increase their "Closing Ratio" by having staff take orders while you are in the queue. They recognized that if they let you wait in your queue for too long, you may just walk away and they will lose an order. Finally, they increase their "Order Size" by up-selling and up-sizing. Through the power of compounding, McDonalds is today the largest fast food restaurant in the world! In Singapore, their sales doubled just from the above. Today, they are opening McCafe, a higher end version of McDonalds fast food, with gourmet coffee and sandwiches to increase their "Number of Sales Call", "Closing Ratio" and "Order Size" even further.
Other examples of compounding at work include Multi-Level Marketing and Affiliate Marketing in the Internet Marketing world. Today MLM and Internet Marketing are two of the fastest growing industries and there's still no sign of slowing down!
Start making the power of compounding work for you today!
About Cher Hung Seet
C.H. has a Bachelor of Science Degree in Electrical Engineering and a Masters in Business Administration. He spent a large part of his career working for large multinationals such as Hewlett Packard and Rockwell Automation. C.H. now heads a German multinational in SE Asia and is the author of the blog http://www.ezinspirations.com focusing on Success in Life!
In his free time, C.H. indulge in hobbies like Fishing, Cycling, Motorbiking, Photography. He has another blog at http://www.fishinghorizon.com focusing on his fishing adventures throughout the world!
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