A Decade Can Change Everything

We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten.

Bill Gates

Having been retired for over 10 years now and taken 9 years to get to Financial Independence, we know that playing the decades-long game is the key to success. And that goes for things other than investing and retirement, like a marriage, a passion project, raising kids, friendships, etc. Society constantly tries to trick us into chasing after quick dopamine hits—like social media, speculative investments, online gambling—but the truth is success only comes to those who wait.

When you start investing, the first year won't change your life. The second year probably won't either. But the tenth year? Whole different story.

Just like rolling a snowball, the initial effort is huge. But once it gets big enough, it takes on a life its own. Just like a snowball, your portfolio gains momentum and grows on its own with little effort from you.

The problem is with how our brains are wired. We tend to think about things linearly, not exponentially. After investing for just 1-2 years, we want immediate results, and don't see how our net worth can double or triple in a decade. We don't understand how a penny doubled every day for 30 days can turn into $5.3 Million dollars.

But if you can understand this concept, you will master your finances.

To illustrate this, here's an example:

Let's say you start with $0 net worth and contribute $10,000 each year. At a conservative return of 6% on average over the long term, here's how your net worth would grow.

To demonstrate the power of compounding, I've highlighted how often this fictional person's net worth increases by $100,000. So, the bolded rows are where their portfolio crosses over $100k, $200k, $300k, etc.

The first $100k is agonizingly slow, taking 8 years to get there. However, getting to $200k takes only 6 years. Then after that, to get to the $300k level, it only takes 4 years, then only 3 years to get to $400k, and so on. This is the snowball effect. Once your portfolio gains momentum, growth accelerates faster than you could earn the money.

Here's another way to look at it.

This is a chart of how much money our investor is contributing into their portfolio from their own cash, versus how much is being added to the pile by their investment returns over time.

At first, all the portfolio additions are coming from cash, since it's an empty account. Then in the next year, a little bit of money is being generated from the first $10,000. It's not a lot, but it's something. The year after that, the investments returns are a little bigger, but it's still dwarfed by the cash savings.

Until, that is, around year 13. At that point, the gains from the portfolio's investments are just as big as the cash our investor is adding to the pile. At this point, their money is working as hard as they are. And then after that, the money generated from investments actually overtakes what our investor is saving each year. Their money works harder than they do.

This is the magic of compounding interest.

This effect becomes even more obvious when we chart out how much of their total portfolio is made up of their cash contributions vs. investment gains.

At first, most of the portfolio is made up of their own cash. But over time, the investment gains catch up, then surpass the portion that came from savings. Without this compounding effect, savings would really just be a straight line, which you can see if you drew a line along the top of the blue bars in that chart. But with the compounding effect, we get this hockey-stick shape that's the key to becoming rich.

Once you understand it, the effect of compounding is nothing short of magic. Without needing luck or a genius's IQ, over time you suddenly find that your investments are making more money than you can contribute. Your money works harder than you.

A reader wrote in to us recently, marvelling over how much their net worth has grown exponentially over time.

I'll refer to them as “GraphNerd” and you'll see why that is in a second. Because not only was this reader crazy enough to binge every single post we've ever written on this blog, they also read the entire BORING-ass appendix of our book! And then, because they clearly have a massive boner for spreadsheets, they graphed their net worth and compared it to ours:

Theirs:

Ours:

What's striking is that they noticed the same effect that we did. The first 5 years is slow going, but after that the portfolio reaches a critical point, and it suddenly takes off!

That's why it took us 5 years to reach the first half a million, but only 3 years to grow another half a million.

For our reader, at the 5-year point, they were only at $200K, but another 5 years later, and that number quadrupled to $800K! In other words, it took half a decade to grow the first $200K, but only 2.5 years to grow the second $200K!

Here's what GraphNerd thought about this phenomenon: “I knew that the past few years were going well for my portfolio, but I didn't realize how steep the line has been now for me since 2023 (and how good this will be if it continues for another year or two!). I had about 5 years with modest growth (2016 to 2020), so it is a striking contrast to have the line graph shift to 45 degrees (like you guys had relatively quickly).”

The Time Will pass Anyway

Back in 2017, I wrote this article, talking about how we retired in our 30s, wrote this blog, and published a book by putting in consistent effort over many years. We didn't get dejected by looking at how long it was going to take each endeavour. Since we knew “the time will pass anyway,” we might as well work on it.

Now, 8 years later, the theme of the article still stands: “The time will pass anyway.”

Readers like this one and the one I mention above, started investing right before that article was written. And now, ten years later, one is a millionaire and the other one is 80% of the way there. They knew not to give up at year 2 because of slow results, because they were in it for the long game.

What about you? Where are you in your FIRE journey? If you haven't started, why not?

I'd love for you to come back in 10 years, reference this article, and tell me: “Look how much I've accomplished since this was written!”

Article link: https://www.millennial-revolution.com/uncategorized/a-decade-can-change-everything/