3 case studies to show the power of Compound Growth

Many of my friends know that I invest in the stock market. None know quite the extent to which I am investing (for reasons which become clear after reading the experience of Jason Fieber at Dividend Mantra).

Even without knowing how much I have invested many ask why I am putting aside any money now in my mid-20s when I will presumably have a higher income--and thus more money to spare--in the future. My simple answer--as I am sure most people reading this will appreciate--is compound interest.

One friend in particular could not see how powerful this was after I explained it. As a result, I agreed to send them a series of links about it. Still unconvinced I put together a handful of (fictional) case studies to prove my point. As it finally convinced them, I thought it may be of use to publish it for others to see.

First, let's start by being a little unusual and give you the punch line of this post. What does it seek to prove? Chiefly three things:

1. Starting early in investing/saving money is critical for optimising gains;
2. If you start early you can have periods when you can't set aside money and yet still reap the rewards;
3. You don't need to have large sums set aside but can slowly set aside small amounts of money

Hopefully you will find it of interest. Maybe it will even serve as a useful way of convincing others!

My Three "People"

I have assumed that each person has set aside a certain amount (specified later) and then invested it at the start of the year.

I have also assumed that the annual growth is 5%. Of course, in real life some years would be higher than that and others lower. Similarly, the likelihood is that the actual annualised growth would be higher than this (supposedly since its inception in 1984 the FTSE 100 has delivered an average growth of 17%).

Person A: Consistent Claire

Consistent Claire has a highly consistent, unbroken investing regime. She invests £100 every month from the age of 25 onwards. She continues to do so until her retirement at 65. This is how her portfolio would look in terms of value over that 40 year period:

Age	Person A: Consistent Claire
	Value	Paid In
25	1,260.00	1,200
26	2,583.00	2,400
27	3,972.15	3,600
28	5,430.76	4,800
29	6,962.30	6,000
30	8,570.41	7,200
31	10,258.93	8,400
32	12,031.88	9,600
33	13,893.47	10,800
34	15,848.14	12,000
35	17,900.55	13,200
36	20,055.58	14,400
37	22,318.36	15,600
38	24,694.28	16,800
39	27,188.99	18,000
40	29,808.44	19,200
41	32,558.86	20,400
42	35,446.80	21,600
43	38,479.14	22,800
44	41,663.10	24,000
45	45,006.26	25,200
46	48,516.57	26,400
47	52,202.40	27,600
48	56,072.52	28,800
49	60,136.14	30,000
50	64,402.95	31,200
51	68,883.10	32,400
52	73,587.25	33,600
53	78,526.62	34,800
54	83,712.95	36,000
55	89,158.60	37,200
56	94,876.53	38,400
57	100,880.35	39,600
58	107,184.37	40,800
59	113,803.59	42,000
60	120,753.77	43,200
61	128,051.45	44,400
62	135,714.03	45,600
63	143,759.73	46,800
64	152,207.72	48,000
65	161,078.10	49,200

As you can see, Claire would have invested £49,200 over that period and would be sitting on a pot worth £161,078.10. That is a return of over 327%.

Person B: Late Luke

Late Luke is slow to start investing. He does not start investing until he hits 40. However, when he does he sets aside £250 per month until he retires at 65. He thus invest £150 more per month than Claire but much later. This is how his portfolio value looks over that 25 year period:

Age	Person B: Late Luke
	Value (£)	Paid In (£)
40	3,150.00	3,000
41	6,457.50	6,000
42	9,930.38	9,000
43	13,576.89	12,000
44	17,405.74	15,000
45	21,426.03	18,000
46	25,647.33	21,000
47	30,079.69	24,000
48	34,733.68	27,000
49	39,620.36	30,000
50	44,751.38	33,000
51	50,138.95	36,000
52	55,795.90	39,000
53	61,735.69	42,000
54	67,972.48	45,000
55	74,521.10	48,000
56	81,397.15	51,000
57	88,617.01	54,000
58	96,197.86	57,000
59	104,157.76	60,000
60	112,515.64	63,000
61	121,291.43	66,000
62	130,506.00	69,000
63	140,181.30	72,000
64	150,340.36	75,000
65	161,007.38	78,000

As with Claire, Luke ends with a similar sized final pot of £161,007.38. However, in contrast to Claire, he has had to invest £78,000 in order to achieve this figure. This is nearly £30,000 more than Claire had invested. He has thus had to invest 63% more than Claire to get the same return whilst also having to set aside more each month to do so.

Consequently whereas Claire had a return of 327%, the return for Luke sits much lower at just over 206%. Still a nice figure certainly but much lower than Claire's.

Person C: Inconsistent Ian

Ian starts investing £150 per month from the age of 25. However, due to various reasons from the age of 35 through to 50 is forced to stop putting anything additional aside for investing but does leave his previously invested money to work for him.

However, from aged 50 he begins investing £150 per month once again. His portfolio return for this broken 25 year period looks like this (italics are the years in which no additional funds are added):

Age	Person C: Inconsistent Ian
	Value (£)	Paid In (£)
25	1,890.00	1,800
26	3,874.50	3,600
27	5,958.23	5,400
28	8,146.14	7,200
29	10,443.44	9,000
30	12,855.62	10,800
31	15,388.40	12,600
32	18,047.82	14,400
33	20,840.21	16,200
34	23,772.22	18,000
35	26,850.83	19,800
36	28,193.37	19,800
37	29,603.04	19,800
38	31,083.19	19,800
39	32,637.35	19,800
40	34,269.22	19,800
41	35,982.68	19,800
42	37,781.81	19,800
43	39,670.90	19,800
44	41,654.45	19,800
45	43,737.17	19,800
46	45,924.03	19,800
47	48,220.23	19,800
48	50,631.24	19,800
49	53,162.80	19,800
50	55,820.94	19,800
51	60,501.99	21,600
52	65,417.09	23,400
53	70,577.94	25,200
54	75,996.84	27,000
55	81,686.68	28,800
56	87,661.02	30,600
57	93,934.07	32,400
58	100,520.77	34,200
59	107,436.81	36,000
60	114,698.65	37,800
61	122,323.58	39,600
62	130,329.76	41,400
63	138,736.25	43,200
64	147,563.06	45,000
65	156,831.22	46,800

Despite the break, Ian still ends up with a pot worth £156,831.22 (only a little less than Claire or Luke). However, she has only invested £46,800 over that period--less than both Claire or Luke. As a result, she has seen a return of over 335%.

Start as soon as possible!

So what does this tell us? Well, quite simply, get started early. Even with a break from investing in between you can still expect significant returns if you invest earlier rather than later: even with a small amount.

Similarly, you can invest small amounts and still get huge rewards from it. Even I was amazed by the stark (and exciting) reality that these case studies show up. The quicker you realise this the better. It is just a shame that so many are missing out on this remarkably powerful and simple action. I was myself until little over a year ago!

[Creative commons image reproduced from Flickr user SumAll]