Do You Truly Understand The Power of Compounding? [CHART]

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The Power of Compounding by SG Investor

After conversing with various individuals, I realise many do not truly understand the power of compounding. In the following example, it shows 3 different individuals who starts investing in the same fund at different points in their life. We would assume that the long term average returns of the fund is 7%.

Individual A: Invests $5,000 each year from age 25 to 60.

Individual B: Invests $5,000 each year from age 25 to 35.

Individual C: Invests $5,000 each year from age 35 to 60.

As expected, Individual A who started investing at a much earlier age of 25-years has the largest portfolio out of the three. However, one has to note the huge difference Individual A has compared to the other two for just investing 10-years earlier. Furthermore, Individual B ends up with more money than Individual C, despite the latter investing 2.5x more money than the former. This is due to Individual B investing in an earlier age and allowing that money to keep compounding over the years.

I hope that through this example, everyone would understand the concept of compounding and the importance of starting young. I have assumed a starting age of 25 (where most individuals have started working) and an end age of 65 (Singapore’s retirement age).

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