The Power Of Compounding (it’s worth reminding ourselves)

I was discussing with a client earlier today the power of compounding, as we both lamented how we had left it so late to adequately fill our pensions. Both wishing we had started earlier and been more consistent in our savings contributions. Sure, we had some tucked away but not nearly enough to see us through. We were going to need to engage in some serious investing to ‘catch up’ with where we need to be at this stage in our lives.

Yet it was funny how we were both aware of compounding and its miraculous effect – yet we had not really done anything about it.

The infamous ‘knowing-doing gap’.

We even engaged in exchanging those anecdotal stories of ‘early-birds’ that started funding their pensions in their early 20s and how they would have more in their pensions by the time they were 65 than those ‘laggards’ who left it until their 40s, despite the laggards investing twice as much – even if the ‘early-birds’ stopped making any further contributions!

As Warren Buffet would say, you just need a snowball and a very long hill to roll it down. The rest takes care of itself (well, compounding does).

I should know better as I have had first-hand experience of the power of compounding with our kids’ ‘Child Trust Funds’ (CTFs). CTFs were introduced in the early 2000s as a UK Government initiative to encourage parents to start saving up for their kids’ futures. Especially at a time when Government funding towards higher education was on the wane.

Each child that was born was given a cheque for approx £250 (or maybe £500, I can’t quite recall) and – the parents – invited to set up a savings fund that was tax exempted. Anyhow, our first two kids were eligible for this initiative and so I duly invested it into a stocks & shares CTF. I added £50 per month for the first few years and then (stupidly) cancelled my contributions a few years later. Yet lo and behold, 10-15 years later these accounts have grown significantly.

The power in the growth was of course down to compounding, but the clever part was that the accounts were set up to automatically reinvest dividend payments into more share purchases. This was happening pretty much every month. So the goose kept getting fatter and laying even more eggs. And the process would repeat and repeat. So the accounts grew and grew. What a great nest-egg for them. I wish I’d had this start.

So I might not have as much time on my side as my kids, but it’s never too late to start saving for our futures. As they say, the best time to plant an oak tree was 100 years ago, the second-best time is today.

Leave a Reply