4 minutes read

Unlocking the benefits of Compound Growth 

Duane Littler

Managing money might seem like a puzzle, but here’s a secret: the sooner you start, the better off you’ll be. Have you ever wondered how some people seem to effortlessly build wealth? It’s all about using a little-known phenomenon called compound growth. Imagine setting yourself up for a more comfortable retirement by simply starting early and sticking to a regular savings plan.

How does Compound Growth work?

Think of compound growth as a cousin of compound interest. Compound interest means earning interest on your initial investment, plus the interest you accumulate over time. The fascinating part is that this interest-on-interest system creates a snowball effect, boosting your money’s growth rate. In contrast, simple interest only applies to your first investment.

Let’s use an example to explain this concept. Imagine you invest $100,000 with a guaranteed 5% interest rate, compounded annually. We have captured the result in the table below:

Year Value on January 1 Interest earned (5%) Value on December 31
1 $100,000 $5,000 $105,000
2 $105,000 $5,250 $110,250
3 $110,250 $5,513 $115,763
4 $115,763 $5,788 $121,551
5 $121,551 $6,078 $127,628
10 $155,133 $7,757 $162,889
25 $322,510 $16,125 $338,635

The table explained:

  • Year 1: Your investment grows to $105,000, earning $5,000 in interest.
  • Year 2: Now your investment is $110,250, and you earn $5,250 in interest.
  • Year 3: With compounding, your investment jumps to $115,763, gaining $5,513 in interest.
  • Year 4: Your investment blooms to $121,551, accruing $5,788 in interest.
  • Year 5: Your investment blossoms to $127,628, gathering $6,078 in interest.
  • Year 10: Your investment flourishes to $162,889, harvesting $7,757 in interest.
  • Year 25: Your investment soars to $338,635, accumulating an impressive $16,125 in interest.

Time is critical for Compound Growth

As you can see, time plays a pivotal role. The longer your money compounds, the more dramatic the impact. This mirrors the age-old story of the tortoise and the hare – slow and steady wins the race. If you were to rely on simple interest, your investment would only reach $225,000 after 25 years. The power of compounding gives you an edge by reaching $338,635 – a significant difference.

Remember, compounding isn’t limited to guaranteed interest rates. Stocks, mutual funds, and exchange-traded funds (ETFs) can also harness its magic. Imagine owning dividend-paying stocks. When you receive dividends, you can choose to reinvest them, buying more shares. This snowball effect increases the number of shares you own, boosting your future dividends – it’s like getting “dividends on dividends.”

The same principle applies to mutual funds or ETFs holding bonds or money-market securities. By reinvesting the interest-income distributions, you buy more units, leading to higher future distributions due to your increased unit ownership.

Discipline matters too

The beauty of embracing compound growth is that it doesn’t demand vast sums of money upfront. Even small, regular investments can set you on a path to financial success. These seemingly minor contributions, especially if you begin when you’re young, can yield impressive results in the long run.

Whether you’re saving for retirement, your child’s education, or any other financial goal, the principles remain the same. Starting early and maintaining a disciplined approach can give you a head start in achieving your financial aspirations.

3 Steps to unlock the power of compound growth:

  • Early Investing:
    The longer your money has to grow, the more powerful compounding becomes. Time is your ally in the realm of compounding.
  • Consistent Contributions:
    The amount matters less than your commitment to regular contributions. Even small monthly investments can flourish over time. Adjust your contributions as your financial situation evolves.
  • Hands Off the Gains:
    As your investments grow, the compounding gains contribute to building your wealth. Avoid withdrawing money prematurely, allowing your wealth to flourish.

Get a head start with compound growth

Remember the wise Chinese proverb: “The best time to plant a tree was 20 years ago. The second-best time is now.” If you’ve already started, fantastic! If not, don’t worry – seek guidance from a Wealthstack Expert to kickstart your journey. The key is to get going and stay steadfast throughout your investment voyage. Keep track of your progress with tools like a Wealthstack Dashboard and personalized guidance from our Experts.

Here’s to your prosperous investment journey!

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