It's a mathematical reality that compounding starts the minute you have invested savings that you are not going to raid. There is no magic number. There appears to be a threshold because humans do not think geometrically; we think arithmetically unless we train ourselves away from this.
Ha
+1 Good point. Even for exponential inputs our biological sensors are designed to translate exponential inputs to perceived arithmetic ones. One example that was "illuminated" to me when I did a project which had to make a sensor measure light from partial moonlight to full sunlight. It took an effort to get a sensor to do this while our eyes adjust just fine for both by automatically changing sensors (rods to cones) and adjusting the pupil size. To us even these dramatic logarithmic changes seem reasonable and linear even though they are not.
I think for most people when we invest we really only see some numbers on a brokerage or 401k statement. There are not piles of money sitting in front of us. It is invisible money, not like the cash money you just spent on that can of soup. Now that is real money.
But we do notice a difference if we made $100 vs $100,000 that year. So in the beginning our 10% increase may only be $100 which is a pretty paltry $8 a month, not a great difference in our lifestyle, while later we might see that same 10% as a good $8000 a month. Now that does make a difference in our life.
So while the physical (and financial?) world might be geometric, I think what we really attach to are the emotional differences. $8000 a month really is different than $8 a month, so there really is a critical mass moment for us.
I think this gets to the crux of why it is so difficult for so many people to save. They simply cannot believe in the power of compounding, even when it is shown to them. It does not make intuitive sense. How can you get $8000 a month starting from nothing? In fact, I have shown young people what compounding can do for them, and on one occasion even been called a liar.
Oh well, linear beings in an exponential world.
| From Wikipedia: |
| Illuminance and Surfaces illuminated by: |
| 0.0001 lux Moonless, overcast night sky (starlight)[3] |
| 0.002 lux Moonless clear night sky with airglow[3] |
| 0.27–1.0 lux Full moon on a clear night[3][4] |
| 3.4 lux Dark limit of civil twilight under a clear sky[5] |
| 50 lux Family living room lights (Australia, 1998)[6] |
| 80 lux Office building hallway/toilet lighting[7][8] |
| 100 lux Very dark overcast day[3] |
| 320–500 lux Office lighting[9][10][11] |
| 400 lux Sunrise or sunset on a clear day. |
| 1000 lux Overcast day;[3] typical TV studio lighting |
| 10000–25000 lux Full daylight (not direct sun)[3] |
| 32000–100000 lux Direct sunlight |
