Why Compound Growth Is the Secret to Long-Term Wealth
When it comes to building wealth, most Australians focus on earning more, saving harder, or finding the next big investment. But the real secret isn't hustle — it's time.
Compound growth, or "earning returns on your returns," quietly transforms small, consistent efforts into exponential results. Whether it's in superannuation, investments, or reinvested dividends, compounding rewards patience over perfection.
Albert Einstein allegedly called compound interest "the eighth wonder of the world," adding: "He who understands it, earns it; he who doesn't, pays it." While the quote's authenticity is debated, the principle is undeniable.
How Compounding Works
At its core, compounding is simple: you earn returns not just on the amount you invest, but also on the returns those investments generate. Over time, this snowball effect creates accelerating growth — even without adding more money.
Think of it like a snowball rolling down a hill. It starts small, but as it rolls, it picks up more snow. The bigger it gets, the more snow it collects with each rotation. Eventually, what started as a handful of snow becomes a massive snowball — not because you added more snow by hand, but because the snowball itself grew larger and collected more naturally.
A Simple Example
If you invest $10,000 earning 7% per year, here's what happens:
Without adding any additional money:
After 10 years: $19,672
After 20 years: $38,697
After 30 years: $76,122
That's the same initial $10,000 investment — just with time doing the heavy lifting. Your money has grown more than 7× without you contributing another dollar.
Now, imagine you add $100 a fortnight ($2,600 per year) to that investment:
After 30 years: More than $265,000
The combination of your initial investment compounding, plus regular contributions that also compound, creates extraordinary growth over time.
Breaking Down the Numbers
Let's look at what's happening in that 30-year journey with the $100 fortnightly contribution:
Total amount you contributed: $10,000 (initial) + $78,000 (contributions) = $88,000
Final balance: $265,000
Investment earnings: $177,000
That means investment returns contributed twice as much to your final balance as your actual cash contributions. That's the power of compounding.
The Three Phases of Compound Growth
Understanding how compounding accelerates over time helps explain why starting early matters so much:
Phase 1: The Slow Start (Years 1-10)
In the early years, growth feels modest. You're building your base, but the returns on returns haven't kicked in yet. Many investors get discouraged during this phase because progress seems slow.
Phase 2: Visible Momentum (Years 11-20)
This is when compounding becomes noticeable. Your returns start generating meaningful returns of their own. The snowball is getting bigger and collecting more snow with each rotation.
Phase 3: Exponential Growth (Years 21+)
In the final phase, compounding truly shines. The bulk of your wealth is built in these later years, as decades of accumulated returns generate substantial earnings. This is why the last 10-15 years before retirement are so critical to preserve — and why market downturns near retirement require careful management.
Why Time Matters More Than Timing
Trying to pick the "right" time to invest often leads to missed opportunities. Markets rise and fall, but compounding only works when your money stays in the game.
Consider the cost of market timing gone wrong:
The Perfect Investor vs The Unlucky Investor
Imagine two investors who each invested $10,000 per year for 20 years:
The "Perfect" Investor somehow managed to invest at the exact market bottom each year — the absolute best possible timing.
The "Unlucky" Investor had terrible timing and invested at the market peak each year — the worst possible timing.
The "Consistent" Investor didn't try to time the market at all and simply invested on the same date every year.
After 20 years:
The Perfect Investor: $690,000
The Unlucky Investor: $560,000
The Consistent Investor: $630,000
The difference between perfect timing and terrible timing? Just 23%. The difference between timing the market and staying consistently invested? Minimal.
The takeaway: It's time in the market, not timing the market, that makes the difference.
The Cost of Sitting Out
Missing the market's best days can dramatically reduce returns. Research shows that:
Missing just the 10 best days in the market over 20 years can cut your returns by roughly 50%
Missing the 20 best days can reduce returns by 65%
Missing the 30 best days can reduce returns by 75%
The problem? The best days often occur during or immediately after the worst periods. Investors who sell during downturns frequently miss the recovery — locking in losses while missing the rebound.
The Role of Reinvestment
To truly benefit from compounding, returns need to be reinvested. That means letting your dividends, distributions, or super fund earnings stay invested instead of being withdrawn.
Inside Superannuation
This process happens automatically in super — earnings are reinvested tax-effectively:
Accumulation phase: Investment earnings taxed at just 15% (compared to your marginal tax rate of up to 47%)
Pension phase: Investment earnings taxed at 0% (within the $2 million transfer balance cap)
That low tax rate makes super one of the most powerful compounding vehicles available to Australians.
Example: A $100,000 super balance earning 7% per year:
Without tax: Grows to $196,715 in 10 years
Taxed at 15% (super accumulation): Grows to $183,846 in 10 years
Taxed at 47% (personal marginal rate): Grows to $152,087 in 10 years
The super environment saves you $31,759 over 10 years compared to holding the same investment personally. Over 30 years, the difference becomes even more dramatic.
Outside Super
Many ETFs and managed funds allow you to automatically reinvest distributions through a Distribution Reinvestment Plan (DRP). This maintains momentum without requiring extra effort or paying brokerage on the reinvested amount.
Without reinvestment: You receive cash distributions, which may sit in a low-interest account or get spent, breaking the compounding chain.
With reinvestment: Distributions automatically buy more units, which then generate their own distributions, creating a compounding loop.
How Compounding Fits Into Your Financial Strategy
For Australians in their 30s to 50s, compounding is most powerful when paired with:
1. Regular Contributions
Salary sacrifice into super or automatic investment plans remove the temptation to time the market and ensure consistent compounding.
Even modest amounts matter:
$100 per fortnight = $2,600 per year
Over 25 years at 7% returns = $176,000
2. Long-Term Growth Assets
Equities (shares) have historically outperformed cash and fixed interest over long periods:
Australian shares: ~9-10% average annual return over 30+ years
International shares: ~10-11% average annual return over 30+ years
Cash/term deposits: ~3-4% average annual return
While shares are more volatile in the short term, time smooths out the bumps and allows compounding to work its magic.
3. Minimising Fees
Even small fee differences compound negatively over time.
Example: $100,000 invested for 30 years at 7% gross returns:
0.10% fee: Final balance $732,067
0.50% fee: Final balance $667,950 (9% less)
1.00% fee: Final balance $607,644 (17% less)
1.50% fee: Final balance $551,876 (25% less)
A 1.4% fee difference over 30 years costs you $180,000 in lost compounding — almost double your starting balance!
4. Avoiding Emotional Decisions
Staying invested through volatility lets compounding do its job. The investors who panic and sell during market downturns miss the recovery and break the compounding chain.
Historical perspective:
The Australian share market has experienced numerous crashes: 1987, 2000-2003, 2008-2009, 2020
Yet over the full period, the ASX has delivered positive returns in approximately 70% of years
Investors who stayed invested through all downturns have been rewarded handsomely
The Math of Starting Early
Let's compare two investors to illustrate the power of starting early:
Investor A: The Early Starter
Starts at age 25
Contributes $5,000 per year for 10 years (ages 25-34)
Total personal contributions: $50,000
Then stops contributing entirely and lets it compound until age 65
Investor B: The Late Starter
Starts at age 35
Contributes $5,000 per year for 30 years (ages 35-64)
Total personal contributions: $150,000
Continues until age 65
Assuming 7% annual returns:
Investor A ends with approximately $602,000 at age 65
Investor B ends with approximately $505,000 at age 65
Investor A contributed $100,000 less but ended up with $97,000 more — all because of 10 extra years of compounding.
The difference? Those first 10 years gave Investor A's money an extra 30 years to compound compared to Investor B's first contributions.
A More Realistic Comparison
Let's adjust the earlier example to show a practical scenario:
Investor A: Starts at 30, contributing $300/month until 40 (10 years), then stops
Total contributed: $36,000
Balance at 40: $52,000
Balance at 67 (with no further contributions): $361,000
Investor B: Waits until 40, then contributes $300/month until 60 (20 years)
Total contributed: $72,000
Balance at 60: $153,000
Balance at 67 (with no further contributions): $234,000
Investor A contributed half as much ($36,000 vs $72,000) but ended with 54% more ($361,000 vs $234,000).
The lesson: Time in the market beats contribution size, every time.
The Power of Increasing Contributions Over Time
While consistent contributions are excellent, gradually increasing your contributions as your income grows can supercharge compounding:
The 1% Strategy
Increase your super or investment contributions by just 1% of your salary each year:
Year 1: Contribute 3% of salary ($3,000 on $100k income)
Year 10: Contributing 12% of salary
Year 20: Contributing 22% of salary (alongside employer SG)
Because your income typically grows over time too, the dollar amount increases even if the percentage stays the same. This "set and forget" approach builds massive wealth without significantly impacting your lifestyle in any single year.
Compound Growth in Real-World Scenarios
Scenario 1: Super Contributions
Sarah, 35, earns $90,000. She decides to salary sacrifice an extra $100 per fortnight ($2,600/year).
Tax saved annually: $845 (at 32.5% marginal rate minus 15% super tax)
Net cost to her take-home pay: $1,755 per year ($67 per fortnight)
Amount entering super (after 15% tax): $2,210 per year
Balance at 67 (assuming 7% returns): $188,000
Sarah sacrificed about $56,000 in take-home pay over 32 years but built $188,000 in super — a 3.4× return, plus the compounding continues in retirement.
Scenario 2: Regular Investment Plan
Michael, 40, invests $500/month into a diversified ETF portfolio:
Total contributions over 25 years: $150,000
Balance at 65 (assuming 8% returns): $375,000
Investment earnings: $225,000 (1.5× his contributions)
If Michael can increase contributions by just $25/month each year:
Total contributions: Still around $200,000
Balance at 65: $515,000
Investment earnings: $315,000
The Dark Side: Compounding Debt
It's crucial to remember that compounding works both ways. Just as it builds wealth when investing, it destroys wealth when you carry debt.
Credit card example:
$10,000 balance at 20% interest
Making only minimum payments (2.5% of balance)
Time to pay off: 37 years
Total paid: $34,000
The credit card company earns compound interest on your balance — the same powerful force that builds wealth is now working against you.
Strategy: Always prioritize paying off high-interest debt before investing. A guaranteed 20% "return" from avoiding credit card interest beats even the best investment returns.
Key Takeaway
Compound growth is the quiet engine behind true wealth. It doesn't rely on chasing returns, picking trends, or timing the market perfectly — it rewards time, consistency, and discipline.
The formula is simple:
Start early — even small amounts compound massively over decades
Contribute consistently — regular additions accelerate compounding
Reinvest returns — let distributions and earnings compound
Stay invested — time in the market beats timing the market
Minimize fees — every percentage point of fees reduces compounding
Think long-term — resist the urge to sell during downturns
The earlier you start, the less you need to contribute to achieve the same result. Whether through super, ETFs, managed funds, or other investments, let time and reinvestment work together — and your future self will thank you for it.
Remember: The best time to start was 10 years ago. The second-best time is today.
Important: This article provides general information only and should not be relied upon as financial advice. Investment returns and compound growth projections are:
Based on historical averages and assumptions
Not guaranteed and will vary over time
Subject to market volatility, economic conditions, and other factors
Shown before any fees, taxes (except where specified), or other costs
Key risks to understand:
Investment risk: All investments carry risk. The value of your investments can go down as well as up, and you may get back less than you invested. Past performance is not a reliable indicator of future returns.
Sequence risk: The order in which returns occur matters, especially near retirement. Negative returns early in your investment journey have less impact than negative returns just before or after retirement.
Inflation risk: Returns must be considered in real (inflation-adjusted) terms. A 7% return with 3% inflation provides 4% real growth.
Concentration risk: Over-relying on compounding in a single asset class or investment without proper diversification can be risky.
Before implementing any investment strategy:
Consider your personal circumstances, including age, income, risk tolerance, and financial goals
Understand that projections and examples are illustrative only and not guaranteed
Review your investment regularly to ensure it remains appropriate
Consider how compound growth fits within a diversified investment portfolio
Factor in all costs, including fees, taxes, and transaction costs
Think about your time horizon and when you'll need access to funds
If you're unsure about the right investment strategy, compounding timeline, or how to balance growth with risk management, seek personal financial advice from a licensed financial adviser who can assess your individual situation.
Ready to harness the power of compound growth?
The team at Redwood Financial Planning can help you develop an investment strategy that maximises compounding, balances risk and aligns with your long-term financial goals.
For more information about investing and compound growth, visit the ASIC MoneySmart website at moneysmart.gov.au.Disclaimer: The information provided in this blog is for general informational purposes only and does not constitute financial, tax, or investment advice. We recommend speaking with a qualified financial adviser before making any decisions regarding your superannuation. Every individual’s financial situation is unique, and personalised advice is essential to ensure the best outcome for your specific circumstances.
