One of the most powerful – and often underappreciated – forces in financial planning is compounding. Compounding is not a product or a strategy, but rather a mathematical reality that quietly rewards patience and consistency over time. Yet, despite how central compounding is to long-term wealth creation, we regularly encounter investors who underestimate its significance in their early years, only to find themselves trying to make up lost ground later in life.
From experience, we have seen that the timing of when you begin investing is often more important than how much you invest or even where you invest. Starting early does not just give your money more time to grow – it fundamentally changes the trajectory of your financial future in ways that are incredibly difficult to replicate if you begin later.
Growth that builds on itself
Compounding works by generating returns on both your original investment and the returns that have already been earned. Over time, this creates a snowball effect, where growth begins to accelerate in a way that feels almost disproportionate to the effort involved. In the early years, progress may appear slow and even underwhelming, which is often why younger investors struggle to stay committed. But the reality is that beneath the surface, something far more powerful is taking place. Each year that your capital remains invested, it begins to work harder on your behalf. Returns generate further returns, and over time, the contribution of growth begins to outweigh the contribution of new savings. This is the point at which compounding truly comes into its own – but it can only be reached if the foundation has been laid early enough. Compounding does not reward those who wait – instead, it disproportionately favours those who give it time.
Why your twenties matter more than you think
Your twenties are often characterised by relatively low income, competing priorities, and a natural inclination to prioritise lifestyle experiences over long-term financial goals, which is completely understandable. For many, these are formative years filled with travel, career exploration, and establishing independence – and asking someone in their twenties to prioritise investing can feel like asking them to sacrifice the very experiences that define that stage of life.
However, what is often overlooked is that even modest, consistent investing during this period can have an outsized impact on long-term outcomes. This is because the real value lies not in the size of the contribution, but in the time those contributions are given to grow. When you invest early, you are effectively buying time – and time is the one resource that cannot be recovered later. Each year that you delay investing effectively reduces the runway available for compounding to do its work. We often remind younger clients that the goal in their twenties is not perfection, but participation. Establishing the habit of investing, no matter how small the initial contributions, creates a behavioural foundation that can be built upon as income grows over time.
The illusion of catching up later
A common misconception among investors is that they can delay investing in their early years and simply catch up later when their earnings increase, which, on the surface, appears logical. Many assume that higher income should allow for larger contributions, which, in turn, should compensate for lost time – which, generally, is not the case.
By the time someone begins investing in their forties, they are not only starting from a lower base, but they are also working with significantly less time for compounding to take effect. The reality is that the window for growth has narrowed, and the burden shifts from time to effort. In other words, what could have been achieved through patience must now be pursued through substantially higher contributions and, in some cases, increased investment risk.
From a planning perspective, this creates a far more demanding and often stressful investment journey. This is because investors who start later often find themselves needing to save aggressively at a stage of life when financial commitments are at their highest – raising children, servicing debt, and supporting extended family. The margin for error becomes smaller, and the flexibility to absorb market volatility becomes more limited. Importantly, even with significantly higher contributions, it is often extremely difficult – if not impossible – to replicate the outcomes of someone who started investing consistently in their twenties.
Short-term sacrifice, long-term freedom
It would be disingenuous to suggest that starting early does not involve trade-offs. For many young professionals, setting aside money for long-term investing requires a huge amount of discipline and delayed gratification. It may mean fewer discretionary expenses, more careful spending, or postponing certain lifestyle upgrades that their peers and counterparts appear to be enjoying. However, what we have observed over time is that these early sacrifices tend to be far less restrictive than they initially appear – particularly when compared to the financial pressure experienced by those trying to make up for lost time later in life.
Behaviour matters as much as timing
While time is a critical component of compounding, it’s important not to lose sight of the massive role behaviour plays in creating wealth. Investors who start early but fail to remain consistent, who react emotionally to market movements, or who interrupt the compounding process by withdrawing funds prematurely, may not fully realise the benefits available to them – meaning the compounding requires not only time, but also discipline. This is why we place such strong emphasis on building robust financial plans that clients can commit to over the long term. A well-structured plan provides the framework needed to stay invested through periods of uncertainty, ensuring that the compounding process is allowed to unfold as intended.
For those who are already in their forties or beyond and have not yet begun investing meaningfully, it is important to avoid falling into a sense of defeat. While it may not be possible to fully catch up, significant progress can still be made with the right strategy and discipline – and by focusing on the levers within your control, such as contribution levels, cost management, appropriate asset allocation, and behavioural discipline. While the investment journey may be more demanding, it is by no means a futile one.
As financial planners, we do not view early investing as an optional extra but rather as a cornerstone of long-term financial security. While life in your twenties should absolutely be lived and enjoyed, carving out space for consistent investing during this period may be one of the most valuable decisions you ever make.
Have a fantastic day.
Sue
