The Compounding Effect for 10-Year-Olds
I recently had the opportunity to visit my son’s 4th-grade class to talk about my career as a Financial Planner. I did my best to make it interesting and relevant for their age, but I think the chocolate coins I brought were probably what they’ll remember most about my visit. That said, as I was putting together a brief presentation, I was again reminded of the power of compound interest and the time value of money. If there is one takeaway from this post, it’s to start investing as early as possible, and even if you feel like you’re late to the game, chances are you can still reap the rewards even if not to the extent that a ten-year-old can.
The exercise of reviewing the time value of money brought to mind “the rule of 72” which is a general rule of thumb I learned many years ago. The rule of 72 states that if you divide 72 by an annual rate of return, that’s roughly how long it will take your investment to double in value while earning that return. To keep it simple, if you divide 72 by 10%, you get 7.2 and that is how many years it will take for your investment to double. In this example, a 10-year-old could double their investment before they graduate high school, or likely see that investment go up 4x or even 8x by the time they purchase their first home. If this money was saved for retirement, it could double seven times, increasing over 128x. This example is overly simplified, and the actual rate of return and the sequence of those returns can impact this, but the point is that time can make a huge difference.
Approximate age Value of $1,000 using a 10% annual compound return and the rule of 72
10 $1,000
17 $2,000
24 $4,000
32 $8,000
39 $16,000
46 $32,000
53 $64,000
60 $128,000
67 $256,000
Since my focus is working with people in or near retirement, you may think this isn’t relevant for you, or possibly even find it discouraging since you don’t have as long of a time horizon. Though the impact won’t be as drastic, chances are you have more money to start with than a 10-year-old, and my recommendation is that even with a more conservative asset allocation that is in-line with your retirement and income plans, you can still take advantage of compound interest and the rule of 72. If we use a more conservative 7.2% rate of return (for simplicity’s sake, though that still may be aggressive for many people in or near retirement) your investment value doubles every 10 years according to the rule of 72, so there is a good chance you can double your investments 2-3 times in your lifetime. The perception of your increasing investment value may not be as clear given there is a good chance you’re also taking withdrawals, but that doesn’t mean that growth isn’t still being realized. I’ve used a starting value of $272,588, which is the average 401k balance for those over age 65 according to Vanguard’s 2024 How America Saves report.
Approximate age Value of $272,588 and a 7.2% annual compound return using the rule of 72
65 $272,588
75 $545,176
85 $1,090,352
95 $2,180,704
I hope this illustrates how investment growth can be realized at any stage of life. If you are close to retirement, be sure you review your retirement plans and structure your investments accordingly, and if you are young, start early even if it’s with a small amount. My first regular investment into a mutual fund began with $25/mo when I had a job working at a Vons grocery store in high school. According to the rule of 72 calculation earning 10%, every $25 I saved should now be worth close to $400.
Please reach out if you’d like to discuss your investment strategy and see how growing your investments can help with your future financial plans, email advisor@blakegallion.com.