Why Time is Your Greatest Asset: The Power of Compounding for Professionals
Time: the one thing busy professionals never have enough of. Between juggling deadlines, client meetings, and life stuff, the idea of financial planning might feel like just another task to procrastinate on. But here’s the secret—time is your greatest ally when it comes to building wealth, thanks to the magic of compounding. Let’s break down why starting now (yes, even with your schedule) can make all the difference.
What is Compounding?
Compounding is the snowball effect of your money growing over time. It’s not just about earning returns on your investments; it’s about earning returns on those returns. It’s quite literally growth, on top of growth, on top of growth.
Simple Interest: You earn returns only on your initial investment.
Compound Interest: You earn returns on your initial investment and the interest it’s already earned.
The Rule of 72: A Quick Guide
If you’re wondering how long it will take for your money to double, the Rule of 72 is a handy shortcut. Simply divide 72 by your investment’s annual return percentage.
For example:
If your portfolio grows at 6% annually, your money will double in roughly 12 years (72 ÷ 6 = 12).
At 8%, it doubles in 9 years.
The higher the return, the faster the snowball grows. But guess what? The earlier you start, the more time compounding has to work its magic. Thank me later.
Why Starting Early Matters
Let’s compare two professionals: Alex and Jamie.
Alex starts investing £500 a month at age 25 and stops at age 35, contributing for just 10 years. Assuming a 7% annual return, Alex’s investments grow to over c£90,000 by age 35 and c£700,000 by age 65 without adding another penny.
Jamie waits until age 35 to start investing the same £500 a month but continues until age 65. Despite investing for 30 years, Jamie ends up with c£600,000.
Who wins? Alex’s head start gave their money more time to compound, proving that it’s not just about how much you invest but how early you start.
Making Compounding Work for You
1. Automate Your Savings
Set up direct debits into your investments. It’s like brushing your teeth—a small habit with long-term benefits.
2. Reinvest Returns
Don’t cash out dividends or interest. Reinvest them to fuel the compounding process. Think of it as rolling your snowball down a bigger hill.
3. Avoid the Temptation to Withdraw
Every time you dip into your investments, you’re not just taking out money; you’re robbing yourself of future returns. Patience pays. The Jimmy Choo’s can wait.
4. Keep Fees Low
High fees can eat into your returns and slow compounding. Look for low-cost funds or index trackers to keep more of your money working for you.
Overcoming the “I’ll Do It Later” Trap
If you’re too busy to think about investing, remember that compounding doesn’t care about your calendar. The longer you wait, the harder it becomes to catch up. A small, consistent effort now can save you from playing catch-up later.
Here’s a thought experiment: Would you rather have £1 million today, or a penny that doubles in value every day for 30 days? Most people go for the £1 million, but the penny’s value grows to over £5 million by day 30. That’s the power of compounding in action.
Final Thoughts
Time may not always feel like your friend, but when it comes to compounding, it’s your best ally. Starting small, staying consistent, and letting time do the heavy lifting is the ultimate wealth-building strategy. So carve out a few minutes today—whether it’s setting up a direct debit or opening an ISA—and let compounding take care of the rest. Your future self will thank you for it.
p.s. not advice obvs!