Imagine starting with just one cent. It may seem insignificant at first, but when you double that amount every day for a month, the results are astonishing. By the end of the 30 days you would have over $5 million! This exponential growth illustrates the power of compounding. As your investment earns returns, those returns themselves generate more returns, leading to accelerated growth over time. Income creating income.
Now I need to burst the bubble. The example given above is not impossible, but it is very improbable.
Let’s use an example with realistic numbers and outcomes:
As of 2023, the Australian stock market had returned an average of 9.2% pa annualised over the last 30 years.
Let’s say when your child is born, you commit to investing $5 per week until they turn 21. Using the average return of 9.2% pa, the investment will grow to around $16,600.
If you were to invest $20 per week, the investment will grow to around $67,000.
And for good measure, $100 per week will grow to around $333,000 across the 21 years.
Whilst this is a crude example that omits fees, brokerage, taxes etc and assumes dividends and distributions are reinvested, the key takeaway here is that starting out small is far better than not starting at all. Whether you're saving for retirement, a dream holiday, or your children's education, the earlier you begin investing, the more time your money has to compound and grow. Even modest contributions can snowball into substantial wealth over the long term.
So the kids are 21 now, they’ve received their payout and whatever the dollar figure is they receive, it’s a boost to get them kickstarted in life. You’re now 50, with a super balance of $250k and you decide it’s time to give your retirement next egg some juice.
Let’s say you are able to afford (and legally contribute) $250 per week as a salary sacrifice contribution to super. Using the same metrics as above and assuming your retire at 65, your super next egg will grow to around $1.4m without adding in your employer contributions and again not including tax and fees.
It’s important to consider the impact of time on your investments. The longer your time horizon, the greater the potential for growth. By staying invested and allowing your money to compound over decades, you can harness the full power of compounding to achieve your financial goals.
So, what does this mean for you? It means taking that first step towards investing, no matter how small. Every dollar you invest today has the potential to multiply and help secure your financial future.
That is the power of compounding.
As mentioned throughout, the examples used are basic and do not encompass all variables inherent in investing that can affect your end result. Past performance is not a reliable indicator of future performance. Reach out to the Hunter FP team to chat about how you can get started.
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