Ben Soppitt

The Power of Small Things — And Compound Growth

For most working professionals, the sins we commit in the process of managing our money are sins of omission not commission.

It’s what we don’t do that hurts us and it does so slowly over the long term. It’s easy to get distracted with the daily goings-on in life and there are many competing priorities many of which are more immediately pressing or more fun than sitting down and doing money. Delaying even for a relatively short time can easily cost over $200K in lost returns.

But putting off or ignoring simple basic everyday tasks involved in managing money can make a very significant difference in our ability to achieve and maintain financial resilience such as:

  • Not maximising deposit interest
  • Not maximising rewards and benefits from card spend
  • Not dollar-cost averaging
  • Minimising costs of investing

Whilst the loses in any one day, week or month are small — they add up over years and due to the awesome power of compounding growth small amounts saved and invested each day can over time grow substantially.

The power of small things is their ability to add up and multiply their impact — like snowflakes becoming glaciers and slowly grinding down mountains.

The problem though is that psychologically we are programmed to do the opposite — 3 powerful biases exist in how humans think that makes it very difficult to start and maintain the behaviours necessary to benefit from the compounding effect of saving small amounts.

1. Boiling Frog Syndrome

It’s a well-known story. Put a frog in a pot full of water and start heating the water slowly. The temperature rises gradually and the frog adapts to it — like taking a bath when it feels hot at first but as soon as we are in it and acclimated it feels lukewarm.

Just when the water is about to reach its boiling point, the frog can no longer adjust itself. At this point, the frog decides to jump. It tries to jump, but it is incapable of doing so, it's too late and the frog dies.

What killed the frog was his own inability to decide when to act.

2. We as humans are generally averse to doing boring, complex, repetitive tasks.

Like working out how much money to transfer into your savings account and visa versa. Or doing a very detailed analysis of your credit card rewards and benefits to maximise your returns. We should be saving and investing as often as we are spending but spending is fun, necessary and gives an immediate reward. Saving and investing may deliver benefits 30 years from now.

3. Hyperbolic discounting

This is the bias to discount rewards based on the delay experienced in receiving them. Its the underpinning of every financial services company’s marketing strategy offering apparently tempting acquisition incentives safe in the knowledge that the long term economics of the product will rarely be a consideration.

Basically we are substantially more psychologically tempted to must buy that coffee today than put it into an investment account and enjoy the benefits in 30 years time.

Consider the case of two friends Emery and Reilly.

Emery started saving $100 a month around the mid-twenties and put it into a low cost highly diversified fund, and diligently continued to do this every day for 30 years. The stock market has on average returned 10% annually.

Reilly was too busy to copy this model and put off saving and investing until 15 years after Emery had started. But having a bigger salary at this point decided to put in more per month in order to catch up and reached the age of 60 having invested the same amount at Emery.

But because of the magical power of compound growth, Reilly could never catch up and ended up at 60 substantially worse off than Emery.

But being Emery really is easier said than done.

No one reading this story will be unfamiliar with this concept. It’s generally when you will be told that just saving less than the price of a Starbucks a day can make you over $200K. Easy. Except it isn’t. Sometimes you really want a Starbucks and you know, what difference would $5 or so really make.

Similarly, no one needs to be told that smoking is bad for you, we should all eat more healthily and be more active.

We make decisions every day that are actually detrimental to us in small and insignificant ways and with the full understanding of the implications but, you know — hyperbolic discounting.

Solving for psychological bias and behavioural change is very hard indeed and in the case of personal fitness, no one can do it for you.

At least in personal finance, you can pay someone to do it for you and that’s been the primary model with wealth managers and personal financial advisors. But they tend to be expensive and you only talk or see them a few times a year and for a lot of people its an uncomfortable and unattractive prospect sharing the minutia of your personal finances with a stranger.

The alternative and we believe the optimal solution for most, is to use technology to automate the manual tasks involved in personal financial management.

That’s what Unifimoney is designed to do. Our average customer should be achieving between $100–150 in passive income per month — interest from deposits, cashback on spend and dividends. We keep track of that and its the first thing you see every time you open our app.

In addition, we round up credit card transactions and have a minimum monthly contribution of $25 into customers investment portfolios.

This small change is automatically and passively invested into a highly diversified low-cost robo-investment platform so our customers automatically and by default model best practices in personal finance.

We want to make it easy to be like Emery and effortlessly build financial resistance every day.