Read Time: 4-minutes
Happy Saturday,
This week, we’re looking at the most powerful force in personal finance, and the 5 rules to get it working for you.
Quick reminder: In case you missed my email on Thursday, 6-Point Saturday is evolving. My goal is to always put the most impactful financial principles in front of you each week. Looking back over the past year of newsletters, I recognized how many of them were built on exactly these types of timeless principles. So starting soon, we're going to revisit the strongest editions. If some things seem vaguely familiar, that's by design. Your finances today probably look different than they did a year ago (or even a few months ago), so the best principles are worth revisiting.
Table of Contents*
*Clickable in the online version.
Point #1 — Your Money & Exponential Growth
In ancient India, a traveling sage arrived at the court of a king renowned for his love of chess.
The king, as was his custom, challenged the stranger to a match, promising any reward the sage desired if he could win.
The sage accepted. And won.
When the king asked what prize he wished, the sage smiled and made a simple request: place one grain of rice on the first square of the chessboard. Two on the second. Four on the third. Double the amount on each square, all the way to the sixty-fourth.
The king laughed. A few grains of rice? For beating the king of the realm?
He agreed without hesitation.
His treasurer did not laugh. By the twenty-first square, the king owed one million grains of rice. By the forty-first, one trillion.
By the sixty-fourth, more than 9 quintillion, a number so large the king could not pay his debt.
At that moment, the sage revealed himself as Krishna (a Hindu deity) and graciously told the king he could settle what he owed over time. The king was relieved.
One of the most underappreciated forces in personal finance is the power of compounding.
That's because humans are used to thinking linearly: one additional dollar earned or one additional dollar saved adds one dollar to your cash flow this month.
But compounding those savings is when your finances begin to really build momentum. Each contribution to your investing account earns returns. Then those returns earn returns. The longer it runs, the more dramatic your growth curve bends upward.
It’s the difference between working for your money and eventually having your money work for you.
So, let’s look at 5 principles to help you start growing wealth exponentially.
Point #2 — 5 Rules to Start Compounding
1. Start Small
Many people avoid investing because they feel like they don’t have a lot to invest. But they’re missing the bigger picture.
Building the habit of investing is far more valuable than the initial amount you begin saving.
You don’t need a lot to get started. It doesn’t matter if it’s $10, $25, $50, $100 or more. Just get started. Then you can increase your savings as you begin to see your efforts pay off.
2. Start as Early as Possible
When it comes to compounding, time is your biggest ally.
Consider two investors, both investing $10,000 per year at a 7% annual return:
The early investor starts at 25, invests for just 10 years, then stops completely at 35. Total invested: $100,000.
The late investor starts at 35 and invests consistently for 30 years until age 65. Total invested: $300,000.
At age 65, the early investor ends up with $1,152,000. The late investor, despite investing 3X as much money, ends up with $945,000.
The early investor ends up with over $100,000 more than the late investor.
That’s the power of getting started early.
3. Don’t Interrupt
Compounding breaks down the moment you pull money out. The 2 common culprits:
An insufficient emergency fund that forces you to raid your investments when something unexpected hits. A 3 to 6 month cash cushion keeps your investments untouched.
Overextending yourself on major purchases, which stretches your monthly budget, makes consistent contributions hard to maintain. Whether it’s a home, car, or otherwise, always check the numbers on the total cost of ownership and be conservative in what you assume you can afford.
4. Automate
The biggest threat to compounding is inconsistency. Life gets busy. Priorities shift. An automated monthly transfer removes the decision entirely.
Set it up once and then let it run. The best habit is the one you never have to think about.
5. Don’t Overthink the Strategy
Overcomplicating your investments is one of the most common ways people stall before they even start.
But most successful investing strategies simply follow a few proven principles: diversification, low fees, and simplicity.
You don’t need to try to pick individual stocks, time the market, or build a complex portfolio. One of the simplest vehicles is a target date fund. You find the specific fund that aligns with your targeted retirement year, and the fund automatically rebalances your mix of stocks and bonds to be more conservative over time.
Point #3 — When Compounding Takes Over
I came across a post this week from someone who might be further along in their wealth-building journey than you are currently. But the lesson it illustrates applies to anyone just getting started.
This poster ran the numbers on what happens when you’re saving $25k per year toward a $2 million goal at various starting balances (what they refer to as Net Worth here).
Then they showed how much more time it would take to hit $2M by reducing savings $10k from $25k to $15k. You might be surprised at the results:
“Picture someone saving $25k/year to get to $2 million. At a certain net worth, cutting down to $15k/year [from $25k] hardly makes a difference.”
Starting NW | $25k/yr | $15k/yr | Difference |
|---|---|---|---|
$0 | 28.0 yrs | 34.5 yrs | 6.5 yrs |
$100k | 24.2 yrs | 28.9 yrs | 4.7 yrs |
$250k | 20.0 yrs | 23.1 yrs | 3.1 yrs |
$500k | 15.0 yrs | 16.7 yrs | 1.7 yrs |
$750k | 11.2 yrs | 12.3 yrs | 1.1 yrs |
$1M | 8.2 yrs | 8.9 yrs | 0.7 yrs |
$1.25M | 5.7 yrs | 6.1 yrs | 0.4 yrs |
$1.5M | 3.5 yrs | 3.8 yrs | 0.3 yrs |
$1.75M | 1.7 yrs | 1.8 yrs | 0.1 yrs |
$2M | 0 | 0 | 0 |
“Past the $750k mark, whether you invest that extra $10k or not barely matters anymore. It moves the needle by less than 1 year. This is for 7% returns. If you’re using 10% returns, it’s even less.”
Starting from zero, that $10k difference means 6.5 extra years to reach your goal. But starting from $100k drops it to 4.7 years. $500k to 1.7 years.
The earlier you start to build your investing base, the sooner compounding takes over.
So much so that at a certain point, investing another $10k per year doesn’t really make much difference of when you hit the $2M mark.
To where you might be fine trading off having that “extra” $10k to spend today and continuing to work for another 12 months or less.
But that optionality only exists if you give compounding enough uninterrupted time to build the base.
Compounding your wealth can feel slow at first.
But then the massive payoff can feel sudden.
Trust the process.
Point #4 — The “Rule of 72” Explained
The Rule of 72 is a simple way to put the power of compounding into numbers you can easily use. This is how it works:
Take the number 72.
Divide it by your expected annual return.
The result is roughly how many years it takes your money to double.
Let’s assume your portfolio will earn 7%. The Rule of 72 says your money will double in about 10 years.
Put $10,000 in at 7% and do nothing else. In 10 years it's $20,000. In 20 years it's $40,000. In 30 years, $80,000.
Want to assume 10% returns? Then it only takes roughly 7 years to double.
The Rule of 72 is a quick, back-of-the-napkin calculation that gets you 80% of the way there. No spreadsheet required.
Point #5 — Quotes of the Week
Which of these quotes resonates most with you?
“The first rule of compounding: never interrupt it unnecessarily.”
“All benefits in life come from compound interest, whether in money, relationships, love, health, activities, or habits.”
“My life is a product of compound interest.”
Point #6 — My Questions of the Week
What's one thing currently interrupting your ability to let compounding work for you?What’s an easy first step to remove it?
Reply to let me know! I read every response.
Thanks for reading — I hope you found a helpful idea or two.
I’ll see you next Saturday with more.
Have a great weekend,
Benjamin Daniel, CFP®
Founder, Money Wisdom
P.S. Want to take control of your money, stop stressing about your expenses, & feel confident about your financial future? There are 2 ways I can help you:
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Disclaimer:
This material is not investment or tax advice. No responsibility for loss occasioned to any person or corporate body acting or refraining to act as a result of reading this material can be accepted by the publisher.
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