The magic of compounding returns: how even small investments can grow big over time

“Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.” – Albert Einstein

Einstein wasn’t an investor, but he understood the incredible power of compounding returns. Read on to see why starting early – even with just a small amount – can transform your future.

Whether you're just starting out with your KiwiSaver account or already building up your investments with managed funds, compounding returns are a key financial concept.

What are compounding returns?

Compounding returns are when your investment earns returns – and then those returns are reinvested and start earning returns too.

Essentially, earning new returns on previous returns.

The earlier you start, the more time your money has to grow. Over the long run, this can turn even small, regular contributions into something substantial – especially when invested in growth-focused funds that have the potential to earn strong market returns over the long-term (for example, our Generate KiwiSaver Scheme Focused Growth Fund).

It’s not about timing the market – it’s about giving time to the market.

A simple example: Emma vs. Liam

Let’s compare two investors:

Emma invests $50 per week from age 20 to 35. This is a period of 15 years.

Liam invests $50 per week from age 30 to 65. This is a period of 35 years.

Both earn an average return of 5.5% per year. We are disregarding fees and taxes to simplify this example.

Emma invested less than half of what Liam did – but ended up with more. Why? She started earlier and gave compounding more time to work.

Don’t wait until you have more money

Think you need to invest a lot to make a difference? The good news is that you don’t.

Even small amounts invested consistently can grow over time. If $10 or $20 a week is what you can manage, that’s enough to get started.

With your KiwiSaver savings, you can also benefit from:

• Employer contributions (if you are earning salary or wages)
• Annual Government contributions (see eligibility criteria here)

These two additional contributions might also be small, but they help accelerate your compounding returns even more.

You can also use Generate’s Managed Funds to take full advantage of compounding.

Compounding returns in action

This graph shows how compounding returns (the green area) increasingly adds to the value of an investment over time.

Disclaimer: The graph does not represent the returns of any actual fund. It is for the purpose of illustrating the concept of compounding returns only, and does not account for inflation or any possible fees, taxes, contributions or withdrawals. The rate of 5.5% is used for illustrative purposes only. Returns are not guaranteed, will depend on many factors and may be negative as well as positive.

How to maximise the effect of compounding returns

Here’s how you can use this powerful concept to grow your wealth:

• Start early – time is your biggest asset. Starting now is better than waiting for the "perfect" time.
• Contribute regularly – if you’re self-employed or not contributing to your KiwiSaver account via salary or wages, automate your own regular KiwiSaver contributions so they happen without thinking. Consistency is key.
• Stay invested – don’t let short-term market drops scare you out of long-term gains.
• Choose the right fund – make sure your KiwiSaver account or managed fund is working as hard as it can. We can help with that.

Let’s get your KiwiSaver investment or managed fund working harder

The best time to plant a tree was 20 years ago. The second-best time is now.

You don’t have to be rich to build wealth – you just need to start, and stay the course. Then just let the magic of compounding returns do the heavy lifting.

Talk to one of our friendly Generate advisers today to make sure you’re in the right KiwiSaver fund and on the best track for long-term growth.