Bill Gates once said that we overestimate the change that will occur in the next two years and underestimate the change that will occur in the next 10.
This is especially true for investing and early retirement. It took my husband and me nine years to achieve FIRE, Financial Independence Retire Early, so we know that the long game is the key to success.
Modern society pushes us to chase quick dopamine hits – such as social media, speculative investments and online gambling – but the truth is success takes time.
When you start investing, the first year won’t change your life. The second year probably won’t either. But the 10th year? Whole different story.
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The problem is how our brains are wired. We tend to think about things linearly, not exponentially. After investing for just a few years, we want immediate results. It can be difficult to see how our net worth can double or triple in a decade.
But if you can understand this concept, you will master your finances.
Here’s an example: Let’s say you start with $0 net worth and contribute $10,000 each year. At a conservative return of 6 per cent on average over the long term, here’s how your investment gains would grow.
Your investment gains would be $600 at the end of year one, $1,236 at the end of year two, $1,910 at the end of year three. After 13 years, your investment gains would grow to $10,121.96, exceeding your contributions. After 25 years, it would be three times that of your contributions, growing to a whopping $30,489.35.
Here’s how your net worth would grow:
The first $100,000 is agonizingly slow, taking eight years to get there. However, getting to $200,000 only takes another six years. Then after that, to get to the $300,000 level, it only takes four years, then only three years to get to $400,000, and so on. This is the snowball effect. Once your portfolio gains momentum, growth accelerates faster than you could earn the money.
Here’s another way of looking at it. Below is a chart of how much money our investor is contributing into their portfolio from their own cash, versus how much is being added to the pile by their investment returns over time.
At first, all the portfolio additions are coming from cash, since it’s an empty account. Then in the next year, a little bit of money is being generated from the first $10,000. It’s not a lot, but it’s something. The year after that, the investments returns are a little bigger, but they’re still dwarfed by the cash savings.
Until, that is, around year 13. At that point, the gains from the portfolio’s investments are just as big as the cash our investor is adding to the pile. Now their money is working just as hard as they are.
After that, the money generated from investments overtakes what our investor is saving each year. As time goes on, you can see the exponential growth.
This is the magic of compounding growth. Without needing luck or a genius’s IQ, over time you suddenly find that your investments are making more money than you can contribute. Your money is working harder than you.
Now, you might think that a decade is too long – and you can’t can’t wait that long. But whether you invest or not, you can’t stop time. So invest your money, because it will eventually work harder than you can.
A decade from now, you could be much richer than you think.
Kristy Shen and Bryce Leung retired in their 30s and are authors of the bestselling book Quit Like a Millionaire.
