The Power of Compound Growth

compound growth

When it comes to investing, you want time on your side.

Make time your ally through compound growth. Compound growth happens when your investment gains, such as interest or dividend income (profits), are reinvested, and the gains on the additions are reinvested, and so on. With compound growth, the earlier you start saving, the less you'll have to put away each month.

In other words, once you've worked for your money, your money starts working for you.

Let’s look at a few scenarios:

Scenario One:

At age 20, Maureen puts $2,000 into an RRSP. For each of the next two years, she adds $2,000 (for a total investment of $6000), and then stops making contributions. If those three contributions averaged a return of 10 per cent per year, at age 60 she'll have over $240,000.

Scenario Two:

At age 40, Josh makes his first contribution of $2000. He then makes $2,000 contributions faithfully every year for the next 19 years (for a total investment of $40,000), also averaging a 10 per cent per year return. At 60, Josh will have $126,000, almost 50 per cent less than Maureen.

The reason why Maureen’s $6000 investment will grow to almost double Josh’s $40,000 investment, is because Maureen’s investment will compound every year for 40 years. Each year she earns additional interest on the interest she earned in previous years. In other words, her $6000 investment was worth $6600, then $7260 (10 per cent growth of $6600), then $7986 (10 per cent growth on $7260) and so on. In fact, after only seven years her money will almost double.

The key point of this story is to invest as soon as you can in order to let your money work for you.