The power of compounding is truly amazing. I know I have written about the concept of compounding several times but truth be told, it is scary how powerful compound interest truly is. If you had £100,000 in savings by the time you were 30, parking it in low-cost, good stocks that earned the same rate of return as the stock market for the past century would result in £14,200,000+ by the time you were Warren Buffett’s age. That assumes, of course, that you never add another penny in deposits to your investments, instead spending everything you earn outside of the portfolio for the rest of your life. You could become a total profligate and still end up with an eight-figure net worth.
Right about now is the time that someone who doesn’t understand the power of compounding makes some underwhelming comment about how it is unrealistic or impossible to expect a 30 year old to have £100,000 saved. Really? If you graduated from college at 18 years old, and spent 12 years saving £524 per month, putting it aside into a fixed income investment yielding 5% interest, you’d have your £100,000 at 30 years old.
If you can’t save £524 per month in the prime of your life, when you have no fixed costs, you don’t deserve to be rich (those with medical problems or bills being the obvious exception as these cannot be predicted or avoided).
And for those who went to university, the chances of saving £100k are even greater, even with the later full time starting working age of 21.
For those who want a breakdown, have a look at the article I wrote on how the average UK worker should be able to save £10,000 a year.
Saving this amount a year is easy but not simple. You have to want it. You need to have to be able to skip a couple of nights or meals out a month. You have to forgo a few lattes here and then. You have to want to be financially free as much you want to live your best life. You have to make it a priority.
Every week, I receive a couple of messages from people who are 23, 27, or even 30 who have no debt and six figures in the bank after they started reading my blog and other writings years ago. It is completely doable. You just have to want to do it.
Getting rich isn’t hard. Compounding is so terrifyingly powerful that Albert Einstein called it the “greatest force in the universe”. Small changes, added back on themselves, result in enormous differential outcomes. Hard work is great. Hard work is moral and good. When it comes to retiring rich, though, why not just harness the horse that is compounding and hitch your fortune to it? Even if, in the most improbable scenario, I lost everything I have, failed miserably for the next 40+ years, and sat around doing nothing all day, I would still be able to live far better than the average person because of decisions I am making before I turn 30. Early planning can forgive a lot of financial sins. Put it off just a decade or two and you’ve lost a huge advantage.
If you are under 30 years old, it will take very little effort for you to retire rich. If you don’t, it is your own failure. Just as gravity will pull a boulder down a hill once you give the initial push, compounding will build your fortune if you kick the process off, starting the chain reaction. You don’t have to live in fear of government budget cuts, layoffs, pension collapses, or shivering through winters because you can’t afford to turn on the heat.