Making Money Work While You Sleep

Hello Friends,

Happy Monday. Last week we looked at the difference between income and wealth and why the two are so often confused. This week we get into what is arguably the most underappreciated financial concept available to anyone who is not yet retired: compound growth.

The quote most often attributed to Albert Einstein, whether accurately or not, describes compound interest as the eighth wonder of the world. The sentiment, whoever first expressed it, is mathematically defensible.

Here is what compound growth actually means in plain terms. When you invest money and it earns a return, that return gets added to your original amount. The next time a return is earned, it is calculated on the new, larger total. Over time, this means that the growth is not linear. It accelerates. The longer the money is invested, the faster the compounding effect becomes.

The Numbers That Make This Concrete

Let us use a straightforward example. Two people, both starting with nothing. Person A begins investing the equivalent of $200 per month at age 25. Person B waits until age 35 to begin the same monthly investment of $200. Both earn an average annual return of 7 percent, which is broadly in line with long-term historical averages for diversified equity investments.

By age 65, Person A has accumulated approximately $525,000. Person B, who started just ten years later with identical monthly contributions, has accumulated approximately $243,000. Person A ends up with more than twice as much, despite having contributed only $24,000 more in actual payments.

Source: Vanguard Investor Education (2023). The Power of Compounding. Vanguard Group.

The ten-year difference in starting time is worth more than double the final outcome. That is not intuitive. It is also not reversible. Time spent not investing is not neutral. It is a cost.

Why Most People Miss This Window

The years in which compound growth has the most impact are the early ones, typically the twenties and early thirties. These are also the years when most people are earning the least, paying off student loans or equivalent debts, building careers, and making the initial adult financial decisions that feel, at the time, like they are too small to matter.

There is also a psychological barrier that researchers have documented extensively: the human brain is not naturally equipped to think in exponential terms. We are wired for linear thinking. We can intuitively understand that saving $200 per month for a year gives us $2,400. We cannot easily feel, in an intuitive way, what that $200 per month becomes over 40 years of compounding. The numbers are too large to feel real until they are.

Source: STANGO, V. and ZINMAN, J. (2009), Exponential Growth Bias and Household Finance. The Journal of Finance, 64: 2807-2849. https://doi.org/10.1111/j.1540-6261.2009.01518.x

The Context Matters

It is important to acknowledge that this conversation looks different depending on geography, access, and economic context. For many professionals across Africa, Asia, and the global south, the investment vehicles that make compound growth accessible in Western financial contexts, low-cost index funds, pension schemes with employer matching, tax-advantaged savings accounts, are either unavailable, less accessible, or come with their own risks and complications.

The principle of compound growth applies universally. The instruments for accessing it vary significantly by location. What is important is finding the legitimate, regulated, low-cost options available in your specific context and beginning to use them consistently, even at small amounts. The regularity matters as much as the quantity.

For those based in Nigeria, the Securities and Exchange Commission and the Central Bank of Nigeria both maintain resources on regulated investment products. For those in the UK, the Financial Conduct Authority provides an accessible register of regulated financial advisors and investment products. In the US, the Consumer Financial Protection Bureau offers free financial education resources with no commercial interest.

The broader point is this: the best time to start was earlier. The second best time is now. And the worst position to be in is looking back in ten years knowing that you understood the concept but did not act on it because starting felt too small to matter.

Next week brings us to the close of our August theme. We will be asking the questions that do not have tidy answers, the ones most people rarely say out loud. Come ready to be honest.

Fiyin

Team Konseye

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