The ‘Magic’ of Compounding: A Path to Investment Success
The ‘magic’ of compounding has been a long-held belief of strategic investors. Their focus is on the attainment of SMART goals. The ‘secret’ lies in compounding—a powerful financial strategy that allows small, consistent savings to grow exponentially over time.
Compounding makes your money work harder for you, turning today’s sacrifices into tomorrow’s rewards. Whether you’re saving for a near-term lifestyle goal, or a stress-free retirement, compounding is the key to achieving your financial goals faster.
We all dream of achieving life’s big milestones – buying your first/ next home, funding your children’s education, or retiring comfortably. Perhaps compounding is the ‘sauce’ you need to achieve these goals without making drastic changes to your lifestyle?
The Importance of Compounding
When it comes to successful investing, the mantra isn’t “location, location, location”—it’s time, time, time. The ‘magic’ of compounding transforms small, consistent efforts into substantial results.
How Compounding Works
Over time, a regular savings plan can turn modest contributions into a significant sum, bringing you closer to your financial goals. Here’s an example: starting with $100 and adding $100 each week to an investment earning a 5% annual return (paid monthly).
Investment Growth Over Time
5 years 10 years 15 years 20 years 25 years 30 years
5% return per annum (paid quarterly): $29,598 $67,454 $116,037 $178,386 $258,402 $361,092
Table 1: Investment of $100 plus $100 weekly savings, compounding monthly (figures exclude taxes, fees, and market fluctuations).
This is how compounding turns small sacrifices into meaningful results:
- $29,000 in 5 years could contribute to a home deposit or a dream holiday.
- $67,000 in 10 years might help cover a child’s education.
- $258,000 in 25 years could subsidise a comfortable retirement.
Start With a Clear Goal
Having a clear vision of your goals makes it easier to stick to a savings plan. Write them down and remind yourself of the rewards your sacrifices will bring. Consider SMART goals, which are –
- Specific
- Measurable
- Achievable
- Realistic – and
- Time-bound.
Don’t Know Where to Find $100 a Week?
Start by reviewing your expenses or redirecting pay rises and bonuses into savings. Automating your contributions ensures consistency and reduces the temptation to spend.
Why Starting Early Matters
Even if $100 a week feels out of reach, smaller amounts can still have a significant impact. For example, saving $50 per week results in half the outcomes shown in the table, while saving $200 per week doubles them.
The true power of compounding lies in starting early. Here’s a real-world comparison:
A Tale of Two Savers: The Difference 10 Years Makes
Susan plans to retire in 20 years and starts saving $100 per week immediately. Based on a 5% return, she could accumulate $178,000.
Her twin brother Chris, confident in his ability to save more, delays his plan by 10 years. To catch up, Chris saves $200 per week for the final 10 years, contributing the same total amount ($104,000). Despite this, his savings grow to only $134,743—nearly $44,000 less than Susan’s.
To match Susan’s outcome, Chris would need to save $265 per week over 10 years, contributing $137,800 in total.
The sooner you start, the easier the achievement!
Things to Consider
The examples above demonstrate the importance of starting early, but real-world investing involves factors like:
- Taxes
- Fees
- Market fluctuations
- Varying returns
It’s essential to consider these elements when choosing the best investment strategy for your goals, timeframe, and risk tolerance.
Take the First Step
You can start a compounding savings plan today—on your own or with professional guidance. Our team at Continuum Financial Planners is here to help you explore tailored strategies to reach your goals even faster.
Ready to get started? Arrange a meeting with one of our financial planners –
- Call our office (on 07-34213456), or
- At your own convenience, use our Book A Meeting facility,
…and take the first step toward your financial success.
(This article was first published in November 2024.)
