How the doubling works
Compound growth means that your returns begin earning returns of their own. The shortcut for it is the rule of 72: divide 72 by the annual rate of return and you get the approximate number of years it takes money to double. At seven percent, money doubles about every ten years. Forty years therefore holds four doublings, and the last one is as large as everything that came before it put together. That is why the early years matter so much. A dollar invested at twenty-five gets the fourth doubling, and a dollar invested at thirty-five does not.
A worked example
Suppose you invest $300 a month and earn an average of seven percent a year.
- Starting at twenty-five, you reach sixty-five with about $790,000, having put in $144,000.
- Starting at thirty-five, you arrive with about $365,000, having put in $108,000.
- Starting at forty-five, you arrive with about $155,000, having put in $72,000.
The ten-year delay between the first two cases saved you $36,000 in contributions and cost you more than $400,000. A single $5,000 deposit tells the same story: left alone at seven percent, it grows to roughly $75,000 over forty years and only about $19,000 over twenty.
What the averages hide
Seven percent is in the neighborhood of what a broad mix of American stocks has returned after inflation over very long periods. It is a historical average and not a promise. The market does not deliver it annually. It delivers a gain of twenty percent, a loss of fifteen, and several flat years, and the average only emerges for people who stayed invested through all of them. Selling after a drop and waiting for calm is the usual way that people forfeit the result.
The two things that eat it
Fees compound too. A fund charging one percent a year turns a seven percent return into six, and over forty years $10,000 grows to about $103,000 instead of $150,000. Nearly a third of the ending balance went to costs that looked trivial on paper.
Debt is the same machine running in reverse. A credit card balance at twenty-two percent doubles in a little over three years if nothing is paid on it, which is why high-interest debt gets cleared before any serious investing begins.
Note Compounding rewards time more than amount. If money is tight, start with a small automatic contribution now and raise it later, because the years cannot be bought back at any price.
