The Power of Compounding: How Time Can Grow Your Wealth
- Tayme Financial Group
- Oct 10
- 3 min read
When it comes to building long-term wealth, one concept stands above the rest: compounding. It is often called the eighth wonder of the world - and for good reason. Compounding is what turns small, consistent savings into significant wealth over time.
It’s not about luck or timing the market - it’s about time in the market.
What Is Compounding?
In simple terms, compounding means earning returns on your returns.
When you invest or save money, you earn income and/or growth. In the next period, you earn interest and/or growth not only on your original amount, but also on the interest and/or growth that has already been added. Over time, this “snowball effect” accelerates your wealth growth dramatically.
Example 1: Starting Early vs Starting Late
Let’s take two investors, both earning the same 7% annual return (a reasonable long-term assumption for a diversified growth portfolio in Australia):
Investor | Annual Contribution | Investment Period | Total Contributed | Value at Age 65 |
Emma (starts at 25) | $5,000 | 40 years | $200,000 | $996,000 |
Sophie (starts at 35) | $5,000 | 30 years | $150,000 | $505,000 |
That 10-year head start nearly doubles Emma’s balance at retirement - even though she only invested $50,000 more in total. Why? Because her money had more time to compound.
Example 2: Compounding in Superannuation
Superannuation is one of the best examples of compounding in action - thanks to its long investment horizon and concessional tax environment.
Let’s say:
You start with a super balance of $50,000 at age 30,
You and your employer contribute $7,000 per year,
Your super earns an average 6.5% p.a. return.
By age 60, your balance could grow to around $710,000. If you delayed contributing extra until age 40, that same $7,000 per year for 20 years would grow to $375,000.
That is a difference of $335,000 - simply due to time and the power of compounding.
(Assumes annual compounding, no withdrawals, and consistent returns for illustration only.)
The Compounding Formula (for the financially curious)
If you like the maths behind it, compound interest is calculated as:
A = P × (1 + r/n)ⁿᵗ
Where:
A = final amount
P = principal (starting amount)
r = annual interest rate
n = number of compounding periods per year
t = number of years
For example, investing $10,000 at 6% annual return for 20 years (compounded yearly):
A = 10,000 × (1 + 0.06)²⁰ = $32,071
That’s more than triple your original amount!
What Compounding Teaches Us
Start as early as you can. Time is your most powerful wealth-building tool.
Stay consistent. Regular investing, like monthly or annual contributions, builds momentum.
Avoid emotional reactions. Withdrawing or pausing investments breaks the compounding cycle.
Reinvest earnings. Dividends and interest left to reinvest will multiply over time.
Final Thoughts
Compounding rewards patience, consistency, and discipline. Whether you are saving in super, investing in managed funds, or building wealth outside super, the earlier you start and the longer you stay invested, the more powerful your compounding becomes.
At Tayme Financial Group, we help you build strategies that make time and compounding work in your favour - so your money grows while you focus on living your life.
If you are ready to take advantage of the power of compounding, speak with one of our advisers today about building a plan that fits your lifestyle and goals.
General Advice Warning! This information is general advice. We have not considered your objectives, personal or financial circumstances. You should consider the appropriateness of the advice for your circumstances before making any decision. You should obtain and consider the relevant Product Disclosure Statement and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.
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