Power of Compound Returns

Explore the powerful effect that time has on wealth creation

Wealth creation is basically having an invested capital base generating compound returns. Many people do not realise the power of time – the longer the better – on these earnings.

Consider two people have $2,000 pa to invest:

1. Early starter invests $2,000 for only years 1-10 (invests a total $20,000 own funds)
2. Late starter waits 10 years, then invests $2,000 pa every year for 20 years (invests a total $40,000 ie twice as much).

Assume invested amounts have 6.5% pa return after tax; inflation is 3% pa.

The chart shows nominal and Net Present Value (NPV) results after 30 years.

Observe that the Early Starter has more wealth, even though has contributed only half as much as the Late Starter.

This demonstrates:

• incredible power of compound returns for a long term investment (eg superannuation)
• the sooner a person starts wealth creation strategies, the better!