Compound growth
Education, not advice. This lesson is general information, not personal financial advice. The value of investments can go down as well as up, and you may get back less than you put in.
Compound growth is the reason this brand is called Not Too Young To Be Rich. Time is the one thing young people have more of than anyone.
Compound growth means your money earns returns, and then those returns earn returns too. Each year, you’re growing a bigger pile than the year before.
In Level 4 you saw compounding work against you on debt. Investing is where it works for you.
What it looks like
Say you invest 100 a month, and your investments grow by an average of 7% a year. (That’s an example, not a promise. Real returns go up and down every year.)
| After | You put in | It could grow to |
|---|---|---|
| 10 years | 12,000 | about 17,300 |
| 20 years | 24,000 | about 52,100 |
| 30 years | 36,000 | about 122,000 |
| 40 years | 48,000 | about 262,500 |
Look at the last two rows. Ten more years of the same 100 a month more than doubles the result. That’s compounding: the later years grow fastest, because there’s so much more already growing.
Starting early beats starting big
Two friends each invest 100 a month, growing at 7% a year:
- Amaka starts at 25, invests for 10 years, then stops completely. She puts in 12,000.
- Tom starts at 35 and invests for 30 years, until 65. He puts in 36,000.
At 65, Amaka has about 140,500. Tom has about 122,000.
Amaka put in a third as much money, and still ended up with more, because her money had ten extra years to grow.
That example made me start the same week. Not with a lot. Just with something.
The Rule of 72
A quick way to see how long it takes money to double:
Years to double ≈ 72 ÷ yearly growth rate
- At 6% a year: 72 ÷ 6 = about 12 years
- At 8% a year: 72 ÷ 8 = about 9 years
It works for debt too: a debt at 24% doubles in about 3 years if you don’t pay it.
