The Power of Compound Returns
Updated: Oct 23
The Power of Starting Now Why it can be your greatest investment advantage Starting with a smaller amount today can sometimes produce a better result than investing much more later |
Small steps today. A brighter tomorrow.
Important information and general advice disclaimer
The information contained in this material is general in nature and has been prepared for educational and informational purposes only. It does not take into account your personal objectives, financial situation or needs and should not be regarded as personal financial advice.
Before making any financial or investment decision, you should consider whether the information is appropriate to your circumstances and, where appropriate, seek professional financial advice. Where a financial product is referred to, you should consider the relevant Product Disclosure Statement (PDS) and Target Market Determination (TMD), where applicable, before making a decision.
While reasonable care has been taken in preparing this material, information may change over time. Any taxation, superannuation, Centrelink or other legislative information is based on our understanding of the relevant rules at the time of publication and may be subject to change.
Tony Regan is an Authorised Representative (No. 243492) of Professional Investment Services pty ltd, Australian Financial Services License No. 234951.
The Power of Starting Now
It's easy to put investing off.
Does this sound familiar?
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These are understandable thoughts. But waiting for the “perfect time” can mean giving up something that is surprisingly difficult to replace later: Time.
When it comes to building wealth, starting with a smaller amount today can sometimes produce a better result than investing much more later. The reason is the power of compound returns.
What are compound returns?
Compound interest, or more accurately when talking about investments, compounding returns, means you potentially earn returns not only on the money you originally invest, but also on returns that have accumulated along the way.
Think of it like a snowball rolling downhill. At first, it may not seem to grow very quickly. But as it rolls, it becomes larger, and the larger it becomes, the more snow it can pick up.
Investing can work in a similar way. The longer your money remains invested and generating returns, the more opportunity there is for compounding to do some of the hard work for you.
A simple example: $200 a month
Let’s assume you invest $200 per month, and your investment earns an average return of 7% per year, with returns reinvested. The projected value would be approximately:
Time Invested | Approximate value |
10 years | $34,600 |
20 years | $104,000 |
30 years | $244,000 |
40 years | $525,000 |
Over 40 years, the total personal contributions would be $96,000. Under these assumptions, the balance could grow to approximately $525,000. The difference represents the effect of investment returns and returns earned on earlier returns.
The key insightIn this example, the final 10 years add more to the projected balance than the first 30 years combined. That is why time can matter so much. |
How compounding can build momentum
Illustration: $200 per month at an assumed 7% annual return, compounded monthly.
Starting earlier versus investing more later
Now let’s compare two people who each contribute exactly the same amount of their own money.
Sarah starts now
Sarah invests $250 per month for 30 years, earning an assumed average return of 7% per year.
· Total contributions: $90,000
· Approximate projected final value: $305,000
James waits 15 years
James waits until he is earning more, then invests twice as much as Sarah: $500 per month for 15 years, also earning an assumed average return of 7% per year.
· Total contributions: $90,000
· Approximate projected final value: $158,000
Sarah | James | |
Monthly investment | $250 | $500 |
Years investing | 30 years | 15 years |
Total contributed | $90,000 | $90,000 |
Approximate final value | $305,000 | $158,000 |
Sarah has not contributed more money. She has simply given her money more time. Under these assumptions, that additional time produces a projected difference of about $147,000.
Same total contribution. A different result.
“But I can only afford a small amount”
That’s OK. One of the biggest misconceptions about investing is that you need a large amount of money before it is worthwhile starting.
You do not necessarily have to begin with $500 or $1,000 a month. You might start saving $50 a week, $100 a fortnight or whatever comfortably fits within your budget.
A practical approachStart with what you can afford, establish the habit and increase the amount as your circumstances improve. |
For example, someone might start by investing $100 per month. After the next pay rise, the amount increases to $150. When a debt is repaid, it increases again.
Over time, income and the capacity to invest may change. However, the money invested earlier has already had something future contributions can never get back: Extra years to compound.
The cost of waiting
Suppose you want to have approximately $500,000 invested by age 65. Assuming an average return of 7% per year, the approximate monthly investment required would be:
Starting age | Time available | Approx. monthly investment |
25 | 40 years | $190 |
35 | 30 years | $410 |
45 | 20 years | $960 |
55 | 10 years | $2,890 |
The goal has not changed. What has changed is how much time the money has available to grow. Delaying does not necessarily make the goal impossible, but it can mean that you have to do much more of the heavy lifting yourself.
You don’t need to wait for the “right” time
There will nearly always be a reason to put investing off. Interest rates might be high. Markets might seem uncertain. The cost of living may be worrying you. You could be waiting for your next pay rise, bonus or promotion.
But building wealth does not necessarily begin with having lots of spare money. It can begin with making a decision to allocate something towards your future.
Even relatively small amounts can become meaningful when they are combined with:
· regular contributions
· a suitable investment strategy
· reinvested returns
· increases in contributions as your income grows
· most importantly, time
Start with what you can, not what you wish you could
At Your Financial Guardians, we believe financial planning is not about waiting until you are wealthy enough to start. It is about making the most of what you have today to help create the future you want tomorrow.
If you have been thinking about investing but feel you do not have enough money to make a meaningful start, consider changing the question.
Instead of asking…“Can I afford to invest a large amount?”Ask: “What can I comfortably afford to start investing now?” |
Because when it comes to compounding, starting earlier can be more powerful than starting bigger.
Don’t wait for the perfect time to start building your future.Whether you can invest a little or a lot, we can help you understand your options and develop a strategy that is appropriate for your circumstances.Talk to Your Financial Guardians about taking your next step.Contact us on 07 38060695 or email: info@yourfg.com.au |
Important information
The examples in this article are illustrative only and assume regular contributions and a constant 7% annual return, compounded monthly. They do not allow for tax, fees, inflation or changes in investment returns. Actual investment returns will vary and may be positive or negative. Investing involves risk and past performance is not a reliable indicator of future performance. The information is general in nature and does not take into account your objectives, financial situation or needs.
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