The Better Letter: The Power of Compounding

All the best things in life compound.

Lent ends on Sunday with the dawn of Easter, but it has seemed like Lent for more than a year now, and it won’t quite feel over on Sunday, either. However, and finally, there seems very good reason to be hopeful, and Easter always offers hope. This past year has been largely joyless, but every day now seems, if not pregnant with possibility, at least open to the possibility of possibility. 

Joy cometh in the morning, the Psalmist told us, and Easter morning proves the point. But the night can be very long indeed. May it be morning “soon and very soon.”

Last week, I wrote about how math done right is undefeated but that we humans struggle mightily with it. This week’s TBL will focus upon one particular mathematical concept: the power of compounding. 

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The Power of Compounding

Here is my most significant single piece of investment advice. I have offered it to my children and grandchildren: Start saving and investing early. 

Einstein may never have said it (as claimed), but compound interest is a wonder of the world. And anybody can take advantage of it — it is utterly egalitarian. If you do nothing else about your retirement, start saving and investing early. You should also save a lot (about 15 percent makes sense) and stay out of debt, but I’ll stick to just one.

Here’s all you need to take advantage of this sage wisdom:

  1. The brains to know what you’re doing and why;

  2. The patience and commitment to keep at it; and

  3. Time.

That’s it.

Want proof?  

Suppose Ginny opened a Roth IRA at age 19 with $1,000 and for seven straight years she contributed $200 per month to it and achieved an average annual return of 10 percent (that seems high for today’s markets, I know, but please make the assumption* for the sake of the illustration). Let’s further suppose that after those seven years, Ginny doesn’t put another nickel into her Roth IRA.

Now let’s also suppose that Bob isn’t as smart as Ginny (an assumption that my kids will readily grant) and that he doesn’t open his Roth IRA, also with $1,000, until age 26 (the age at which Ginny quit making contributions). However, from that point on Bob makes $200 contributions each and every month through age 65 and gets the same 10 percent average return over that time.

Once you do the math, the results seem impossible.

Ginny, who only made seven years’ worth of contributions ($17,800 total) but started earlier, ends up with more money at age 65 than Bob, who made 40 years of contributions ($97,000 total) but started later. Bob ended up with $1,318,518, which is a tidy sum for having made contributions totaling only $97,000. But Ginny ended up with $1,406,849, even though she made far fewer contributions totaling much less. 

The key, of course, is that Ginny had seven more early years of compounding than Bob did. 

Those seven early years were worth more than all of Bob’s 33 additional years of contributions. Because of time, patience, and the magic of compound interest, Ginny’s $17,800 turned into more than $1.4 million.

If you take no other advice that I offer about saving and investing, please start early. And whatever age you are, get started saving or save more immediately. Please. Time is of the essence.

Even a small change in your habits can make a significant difference over significant time periods.

There are plenty of articles suggesting something like that you can retire by giving up going to Starbucks (the idea originated here). That suggestion is incomplete, of course, but it is remarkable how it can illustrate the power of compound interest. 

Suppose you have been going to Starbucks on weekdays and buying a latte for $5 but decide to give it up and invest that money. Assume that after a month you begin with $100 (20 weekdays of lattes at $5 each) and continue to invest $25 per week (a latte every weekday) for 30 years. Again assuming 10 percent annualized return on your money and further assuming that you do not increase your savings rate even if and as Starbucks gets more expensive, you will have $250,000 (actually, $249,364) at the end of those 30 years. 

That $250,000 is before taxes, of course, and – on account of inflation – isn’t likely to seem like nearly as much money in 30 years. This scenario also assumes no personal circumstances that require using the money (note, however, that we imagine true emergencies far more often than they really exist – “need” is a very strong word). But $250,000, or even half that, is still significant and serves as a good reminder that your savings rate, when your savings are invested wisely, is much more important to your financial future than your rate of return on those savings.

As Tolstoy postulated and experience confirms, “The two most powerful warriors are patience and time.”

These warriors work in other contexts and much more broadly. As I have written before, like compound interest, success is sequential. It takes time for good choices to add up before exploding exponentially. All the best things in our lives provide benefits that compound. Our financial investments do that, and so do our personal and family investments. Generosity and service compound. So do healthy living and education. 

Love is the most powerful compounder of all.

Focus your life’s purposes there. We don’t completely control our destinies or our legacies. But if we invest well — financially and otherwise — our legacies can be profound. 

As investments need to be benchmarked, our lives need it too. No matter what we say, we show what we love by how we invest our time, our talents, and our treasure. We reveal our whys with our love. Our purposes provide benchmarks for how our life choices have compounded.

How are you doing?


* For these purposes, I will assume 10 percent return per annum. The total return of the S&P 500, 1928-2020, annualized (geometric as opposed arithmetic returns), is 9.94 percent per annum (see here). That rate of return – any rate of return – is not guaranteed. Past performance is not indicative of future results. Indeed, given current valuation levels, it is unlikely that returns will be that good at least over the next decade or so. Moreover, as retirement approaches, portfolio risk should decline, suggesting a lower expected portfolio return. However, it is the best data we have.

Totally Worth It

YouTube has spawned a cottage industry of “reaction” videos, whereby the host reacts to and comments upon music s/he has never heard before. Who knew? There are dozens of similar examples, but watch this vocal coach’s raw reaction to a stunning rendition of “Amazing Grace.” 

According to Augustine, our hearts are restless until they find their rest in God. If he is right, it shouldn’t be surprising that, when confronted by beauty and grace, we are so often overcome by unexpected tears (which, in my experience, are always a leading indicator of something significant).

Enjoy this remarkable new video from the Barclay Brass.

My favorite thing this week was this interview with Dave Kindred, the legendary sportswriter, covering girls’ high school basketball at age 79. Here is the best thing I read or saw this week. The cutest. The most beautiful. The most inspiring. The most bizarre. The coolest. The wildest. The sweetest. The best advice. The funniest. The funniest baseball card ever. YikesRIP, Beverly Cleary. RIP, John Polkinghorne. RIP, Bobby Brown, an American hero who won four World Series and missed a fifth because he volunteered for the Korean War, after becoming a physician during the off-season. Let’s raise a parting glass to all three with a perfect magnificent tribute. 

You may contact me via rpseawright [at] gmail [dot] com or on Twitter – @rpseawright – with questions, comments, and critiques. Don’t forget to subscribe and share.

Harry Connick, Jr. put out a new album of hymns just in time for Easter. This one sounds like “N’awlins” and is ideal for Good Friday.


For our Easter week benediction, listen to the great Steve Winwood (multi-Grammy winner and member of the Rock & Roll Hall of Fame) sing about the resurrection.

“Love lives again, that with the dead has been: | Love is come again like wheat that springeth green.”

May you and your families enjoy a blessed Easter.

Issue 57 (April 2, 2021)