How to make your money work for you

It is important to use the power of compounding to secure your future financial well-being

Investors should use the incredible power of compounding to build wealth over time. Alamy
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Did you know that if you fold a piece of paper 103 times, it will become larger than the observable universe? That’s a mind-boggling 93 billion light years.

It might seem impossible to grasp, but it is all about the power of compound growth, a force that can work wonders not just with paper, but with your money, too.

Back in my 20s, when asked about pensions, I couldn’t help but chuckle. Retirement was the last thing on my mind. Tuition fees, rent, student loans and career prospects took precedence.

But looking back, I wish I had heeded the wisdom of US author Tony Robbins, who emphasised that true wealth does not come from earning alone but from setting aside a portion of your money and letting it grow through investment.

It is how you make money work for you instead of the other way around.

Yet some people try to take shortcuts. They gamble their money in emotionally driven investments, hoping for quick riches. Others simply procrastinate, believing retirement is too far off to worry about.

However, hope is not a strategy. It is why 95 per cent of people find themselves living below their desired standard in retirement.

So, how can you ensure you are among the financially successful 1 per cent?

Let us return to our paper analogy for a moment. A typical sheet of paper is about 1/10th of a millimetre thick.

When you fold it in half, its thickness doubles. With each subsequent fold, the thickness grows exponentially. Just 103 folds, and you’re outside the observable universe.

The lesson here is that when harnessed correctly, the power of compounding can be your key to wealth, no matter your age.

However, most people fail to grasp the incredible power of compounding. It is like the multiplying force of growth times growth.

This is why getting on the right financial path and staying on it is crucial for your future financial well-being.

Let us explore another analogy, this time involving a chessboard and rice.

As the tale goes, a traveller defeats a king in a game of chess and requests rice as his reward. The king agrees, with the stipulation that each square on the chessboard should have double the amount of rice as the previous one.

As the squares fill up, the required rice grows exponentially. By the time the traveller reaches the last square, he needs an astronomical amount of rice (9,223,372,036,854,775,808 grains of rice to be precise).

The story illustrates how compounding can turn small amounts into vast sums over time.

Now, let us apply this concept to investing.

Consider two friends, Will and Mike. Will starts investing at 19, puts away £500 ($606.7) a month for eight years, and then stops. His invested money, however, continues to compound.

Mike, on the other hand, starts later at 27 and consistently invests the same amount until he is 66.

Despite investing for 31 years longer than Will, Mike ends up with less money, simply because he started later (and was never able to catch up).

Will’s account, thanks to compounding, reaches about £2,901,579.42 at age 66, while Mike’s is at £2,537,257.67.

The difference? £364,321.75. If Will had continued investing until 66, he would have amassed £5,511,115.02.

The key takeaway here is that even small, consistent efforts can lead to substantial progress over time.

In the world of investing, a 10 per cent annual return, similar to the historical average of the US stock market, can double your money every seven years.

Time is the investor’s best friend, allowing you to make up for a lack of substantial initial capital.

Whether in life or investing, compounding is a powerful force. You might say that the life equivalent of compound interest is wisdom.

Learning from the past can help us make better decisions in the future, and those lessons build on one another over time.

Now, the people I often speak to are well beyond their 20s, dealing with complex financial matters.

So, how can you achieve similar success? It boils down to a few simple (but not easy) steps:

1. Find clarity about your “why” and your current financial situation.

2. Be confident about your vision for the future.

3. Take control of your ideal future and be accountable for its progress.

Often, it helps to seek sage guidance from someone who has a deep understanding of your situation and objectives.

That is the recipe for ensuring you are not just hoping for a financially secure future, but also actively working towards it, using the incredible power of compounding to build wealth over time.

Sam Instone is co-chief executive of wealth management company AES

Updated: October 27, 2023, 6:02 PM