Updated: Jan 23
Unless you live under a rock, nearly every person in this era has probably heard of the great investor Warren Buffet. Additionally, you are probably well aware of his financial achievements and his incredibly successful multinational conglomerate, Berkshire Hathaway. Today, he is the envy of so many, and so many people seek to study his methods. One of his most well-known claims to success is his ability to understand compound interest and the returns that it provides over the long term. When looking at how compound interest works, we can see the amounts initially invested, and we are also able to forecast the expected return because, in all honesty, numbers are relatively easy to understand and they are perfect. This is not an attempt to undervalue Warren Buffet's achievements though, what he has accomplished over his lifetime is amazing, and one can only dream of being that good at her or his trade. However, Mr. Buffet put in many hours and lots of hard work to get where he is today, and even though most people acknowledge that "hard work" is the key to success, very few understand it from a quantified perspective. Let us take Mr. Buffets' compound interest theory, apply it to our own work/time/effort values, and maybe we can better understand what it means to be successful for ourselves.
Let us now look at a couple of different statistics before we get into our rough calculations. According to data released by the Bureau of Labor Statistics, the average worker in the United States works 34.4 hours a week. That is less than the standard 40 hour workweek that most adults in America are accustomed to! Second, according to the U.S. Census Bureau, the average income in the United States is approximately $31,100. (I recognize these numbers are subject to change based on time and other factors, but we will use these statistics as our rough averages which are accurate enough to explain the points.)
We are now going to attempt to place value on human input and output the same way in which we place value on investments. While this will not be perfect because there are virtually millions upon millions of variables that are at play in our lives and our successes, we will seek to only understand some of the more relevant and controllable variables in our daily lives which may be attributed to our successes.
Using the averages listed above, we can assume that if you work 34.4 hours a week, then you will likely make around $31,100 a year. Since there are 52 weeks in a year, you will have worked a total of approximately 1,789 hours in a year. Taking that number we now will divide it by 8760 which is the total number of hours you have in a year. After doing a little math, we can see that the average person commits 20.4 percent of their time to work a year. Not as much as one might of thought. Next, let us multiply 1789 (the hours worked in a year) by 20 years. In doing this we come to a round number 35,780 hours, which is the total number of hours worked over 20 years based on the averages. Let us now ask the question, what if we increased our work hours per week by 5?
Using the same calculations explained above I will now add 5 hours a week extra dedicated to work.
Work hours per week = 39.4 (still less than the standard 40 hour workweek)
Work hours per year = 2,049
Percentage of hours dedicated to work = 23.3 percent
Hours worked over 20 years = 40,980
Difference in percentage = 2.9 percent
Difference in hours worked per year = 260
Difference in hours worked over 20 years = 5,200
After observing these calculations, what are the big takeaways?
1. If I add 1 hour of work a day in a 5 day work week, I will have increased my yearly work percentage by nearly 3 percent, yet it is still less than 1/4th of my life's hours over a year.
2. If I add 1 hour of work a day in a 5 day work week, I am still working less than the standard 40 hour work week, yet I am being more productive than the average person.
Now let us look at the potential value breakdown and twist the numbers a bit.
If the average person makes $31,100 annually, then that person will have made $622,000 over 20 years. Second, if someone works an additional 5 hours a week then they will have increased their productivity by 2.9 percent a year. If we take that percentage of increased productivity per year and we use it as a compound interest rate percentage, we can now calculate how much more a person may make over 20 years. (stay with me here). Finally, After using a compound interest rate calculator, a person will have made $906,298.76. This is nearly $300,000 more than the average person over 20 years, and you only committed 5 hours of extra work a week!
This now draws the question, what if I commit 15 hours of extra work a week for a total of 49.4 hours. I am going to spare you the agony, and just get right to the numbers.
Work hours per week = 49.4
Work hours per year = 2,569
Percentage of hours dedicated to work = 29.3 percent
Hours worked over 20 years = 51,380
Difference in percentage = 8.9 percent
Difference in hours worked per year = 780
Difference in hours worked over 20 years = 15,600
Compound Interest rate of 8.9 percent over 20 years = 1,884,488.20 (This is 3 times as much as the average person!)
But wait it gets better, If you've followed me to this point then I assure you we are almost done. The compound interest values stated are all based on $31,100 annually with an annual contribution of $31,100 multiplied by the interest rate. The reality is though if you work more hours than you make more than $31,100 and therefore have more to contribute to your overall value then previously calculated, and therefore your end game looks even better! While this is not perfect by any means, hopefully, these numbers give you a visual on what it is like if we were to effectively quantify some of the controlled variables in your success.
...SO YES IT'S TRUE WHEN INCREDIBLY SUCCESSFUL PEOPLE TELL YOU THAT HARD WORK PAYS OFF, BUT WHAT I THINK THEY ARE SAYING IS, IT IS WORTH "COMPOUNDING YOUR VALUE"...
For every hour of work that you do beyond the average, you are that much better off and ahead of the game, and while our brains are not yet capable of perfectly quantifying our work values, the results don't lie.
By Rocco Turzi
All comments are welcome!