The power of compounding is often hard to understand, especially when you’re just getting started. But it plays a big role in how savings grow over time – and why when you invest can be even more important than how much you invest.
To show how compounding works in practice, here’s a simple hypothetical example.
This example is designed to show why starting young can make such a difference – whether that’s for you, or for a child or teenager you’re helping plan for the future.
Meet our two investors: Ella and Jack
Ella starts investing $2,000 a year at age 19.
She contributes $2,000 a year until she is 27.
Her total contribution is $18,000.
Jack doesn’t start investing until he is 28.
He contributes $2,000 a year until age 65.
His total contribution is $76,000.
Both investors earn a hypothetical 10% return each year, with no withdrawals.
(You can see the full year-by-year comparison in the full chart.)
Who has more money at age 65?
If you guessed Ella, you’re right – and the reason comes down to time.
By age 65:
• Ella’s $18,000 grows to just over $1.0 million
• Jack’s $76,000 grows to $728,087
Ella ends up with around 56.4 times what she put in (every $1 she invested became about $56.40)
Jack ends up with around 9.6 times what he put in (every $1 Jack invested became about $9.58)
A closer look at what’s happening
Both Ella and Jack did well. In fact, Jack built a substantial balance by consistently investing over many years.
The difference is that Ella’s money had more time to compound.
Ella invested $58,000 less than Jack overall, yet finished with $287,776 more. Each dollar she invested worked around 5.9 times harder than Jack’s, simply because it had longer to grow.
This is the compounding effect in action: returns earning returns, year after year.
Every dollar Ella invested gave her ~$56.40.
Every dollar Jack invested gave him ~$9.58.
This example isn’t about a “right” or “wrong” time to start. It’s about showing two important truths:
Starting earlier gives your money more time to work, even if the amounts are smaller.
Starting later can still lead to strong outcomes, especially when you invest consistently.
No matter where you are in your savings journey, the key is making informed decisions and giving your money the opportunity to grow over time.
Compounding example: early vs later investing
Hypothetical example for illustrative purposes only. Each investor makes their contribution at the end of the year.
Age
Ella – annual contribution ($)
Ella – year-end value ($)
Jack – annual contribution ($)
Jack – year-end value ($)
19
2,000
2,000
0
0
20
2,000
4,200
0
0
21
2,000
6,620
0
0
22
2,000
9,282
0
0
23
2,000
12,210
0
0
24
2,000
15,431
0
0
25
2,000
18,974
0
0
26
2,000
22,872
0
0
27
2,000
27,159
0
0
28
0
29,875
2,000
2,000
29
0
32,862
2,000
4,200
30
0
36,149
2,000
6,620
31
0
39,763
2,000
9,282
32
0
43,740
2,000
12,210
33
0
48,114
2,000
15,431
34
0
52,925
2,000
18,974
35
0
58,218
2,000
22,872
36
0
64,039
2,000
27,159
37
0
70,443
2,000
31,875
38
0
77,488
2,000
37,062
39
0
85,236
2,000
42,769
40
0
93,760
2,000
49,045
41
0
103,136
2,000
55,950
42
0
113,450
2,000
63,545
43
0
124,795
2,000
71,899
44
0
137,274
2,000
81,089
45
0
151,002
2,000
91,198
46
0
166,102
2,000
102,318
47
0
182,712
2,000
114,550
48
0
200,983
2,000
128,005
49
0
221,081
2,000
142,805
50
0
243,189
2,000
159,086
51
0
267,508
2,000
176,995
52
0
294,259
2,000
196,694
53
0
323,685
2,000
218,364
54
0
356,054
2,000
242,200
55
0
391,659
2,000
268,420
56
0
430,825
2,000
297,262
57
0
473,908
2,000
328,988
58
0
521,298
2,000
363,887
59
0
573,428
2,000
402,276
60
0
630,771
2,000
444,503
61
0
693,848
2,000
490,953
62
0
763,233
2,000
542,049
63
0
839,556
2,000
598,254
64
0
923,512
2,000
660,079
65
0
1,015,863
2,000
$728,087
This hypothetical example assumes a hypothetical 10% return on investments, and no withdrawals. Rates of return will vary by investor and are not guaranteed. If the rate of return were altered, results would vary from those shown. This example doesn’t represent any particular investment or fund, investment strategy and doesn’t account for inflation. There may be other material differences between investments that must be considered prior to investing.