The sheer magnitude of compounding is nothing short of mind-boggling. Imagine starting with £100, and if it doubles every 10 years, in 100 years, you could have £1,024,000."

Compounding is easy to understand on the surface but as you go deeper a completely new world opens up. If you start out with £100 and you invest in a stock that doubles every 10 years, after ten years, you end up with £200. So how much will it grow to in 100 years? That is just 10 times longer. Is it ten times as much? Could it be more? Some people have never thought about it and therefore the penny has never dropped. For the few that do understand it, most don’t even try to estimate the number. But I’ll give you a clue – It’s a larger number than you think. The sheer magnitude of compounding is nothing short of mind-boggling.

Let’s look at an example. We have Jane and Bob. They are 25 years of age and after getting fantastic degrees from the most prestigious universities it’s finally time to get a job. When receiving their first pay checks they have different views on what to with the money. 

Jane understands that financial safety can be achieved through owning profitable companies. When the companies make money, that money belongs to the shareholders, and that means that a part of the profits belong to Jane. She likes the idea of having other people working for her without having to deal with hiring or firing, dull business meetings or long weekends. She picks well-known companies that she is familiar with, companies that had been around for decades or even longer and she diversifies by buying a handful of these fantastic companies. She is confident that this was the right way to do it. 

Bob is not interested in the stock market; he believes it is too risky and doesn’t want to give up control of his money. He knows that the stock market is like a big casino and most of the older people he knew had warned him about gambling after themselves losing money on hot stocks that were supposed to make them millions. He now knows better; he would not gamble away his money. He decides to spend his money wisely instead. After all, if you are 25 years old, you have your whole life ahead of you. Better opportunities will come around. Maybe a car is what he really needs? Let’s live a little! 

35 years old. Ten years have gone by. Jane has saved every month and invested in stocks. Bob has a magnificent collection of concert tickets from all the great (and not so great) bands he has seen over the last decade. Outside his house sits a lovely new car. He thinks about how it makes him look in the eyes of his neighbors and he smiles. Life is good!

Savings so far:

Jane: Jane has diligently bought stocks every month. So far, she has put aside £300

12 months 10 years = £36,000.

But the companies she bought have gained in value over this period, and she now has a nice nest egg of £54,000. 

Bob: Has a nice car-loan that costs him £700 per month and some memorabilia. 

45 years old

Jane has continued to invest up until now, but has decided to stop. Her two young children are costing a lot of money. She needs to prioritise. She is confident that she would not need to touch her nest egg if she just stopped saving every month. So far, her investments have grown to £162,000.

Bob has changed his mind. Maybe saving for the future isn’t such a bad thing after all. It’s time to start saving. 

55 years old

Jane’s nest egg has increased to £324,000. She has put no new money in. 

Bob has been saving £300 per month and accumulated £54,000.

65 years old

Jane: No new money. £648,000 saved. 

Bob: £162,000 in total.

75 years old

Jane has been making withdrawals of £10,000 per year from her savings. It has still grown to £1,146,000

Bob has also taken out £10,000 every year. His total is now £174,000.

85 years old

The last 10 years have not been great for the stock market. There have been zero gains over the last ten years. 

Jane has been able to withdraw £10,000 every year and she still has £1,046,000 left.

Bob has done the same. He now has £74,000 left of his nest egg. 

If the story ends here, we could say that they both lived their lives with economic security to spare. But this story does not take into consideration what would have happened if the accumulation took longer, if the inflation was high during their retirement, and the numbers do not reflect normal inflation but instead represent purchasing power in today’s money. All numbers are an approximation and should be taken as an example to help you determine who you would prefer to be and to give an idea of what you can achieve over al long period of time. 

But it also does not mention what happened to Jane’s two children. Growing up with Jane they learned how important it was to invest. When Jane passed away at age 85, her children, 45 year-old twins, were given £500,000 each. That money then grew over the next 40 years to £8,000,000. Each. And this is all coming from what Jane saved between the age of 25 and 45. This is the power of compounding. 

And my initial question about £100 invested over 100 years? 

After 100 years the initial amount will grow to £1,024,000 if it doubles every 10 years, which is about where you will find the historical average depending on which period and country you look at.