Compounding, simply put, means generating earnings from previous earnings. It’s a common term in finance. This is how saving money and being patient makes you rich. You put money in the bank, which makes you more money, which you put in the bank again, and that makes you even more money. It’s a slow but steady approach that usually yields great results for those who can wait.[1]

This process has a name that goes beyond finance jargon: Autocatalysis.

Autocatalysis means that the process’ output produces the necessary input for a similar reaction. Anything with an element of autocatalysis will grow exponentially, and faster.

The important thing to learn then is how to apply autocatalysis to our lives. Some things can have compounding effects, such as savings, but some things can’t. Staying awake won’t compound, you need a consistent amount of sleep. Here are three other areas of life that have compounding effects, when done right:

Productivity

The problem with most people’s productivity is their lack of systems in their daily lives. They trust their memory. They trust their willpower. They trust their energy. All recipes for disaster. We forget things, our willpower is limited, and our energy gets depleted. This is normal human behavior. The solution is not to power through our human flaws, but to structure our lives in a way that we avoid them completely.

When you apply the right systems[2] in your daily life, things get done with less effort, faster, and better. You accomplish more. And when you accomplish things, you have more time to accomplish even more. This is the number one “secret” behind winners: systems.

Networking

There is no mystery behind the growth of social networks like Facebook or Twitter. The more people they reach, the more people those people will invite. That process happens over and over again, and before you know it, the network is huge. You start with one member, but because of the inherent autocatalysis of networking, things can grow damn fast.

However, networking doesn’t create value by itself. It’s only a platform. While it may feel satisfying to meet for lunch, or have a Skype call, the returns are limited.

The lesson here is to take networking in our lives seriously early. Build many relationships fast, and then get to work. Once you start doing something noteworthy, the compounding effect of your network will take it from there and get your name across even more networks.

Flexibility

If I’d have to put the three areas mentioned above (personal finance, productivity and networking) in one group, it would be flexibility. Having more money, getting more stuff done, and knowing more people that can help you, are all elements that increase your options of where to spend your resources.

Once again, the key of having options is that it compounds. Having options means you’re valuable. It means more people demanding your knowledge or expertise. It means you’re scarce (or people would just go another way). The more impressive people I know spend a lot of time declining offers and ideas. Having options is the real wealth of the successful.

Bottom Line: Implement autocatalysis in personal finance, systems and networking early in life, and your options will increase exponentially.

Notes:

[1] For anyone interested in learning more about how to use compounding with their personal finance, I recommend I Will Teach You To Be Rich, by Ramit Sethi.

[2] If you want to learn more about systems theory (a topic much more philosophical than it gets credit for), I recommend Thinking in Systems, by Donella Meadows.