Compound interest is what happens when your money earns a return and the return itself starts earning. Instead of growing by the same amount each year, the pot grows on top of its own growth, so the later years add far...
Compound interest is what happens when your money earns a return and the return itself starts earning. Instead of growing by the same amount each year, the pot grows on top of its own growth, so the later years add far more than the early ones. Given enough time, the growth ends up larger than everything you put in.
The corpus principle, from Small Money Plus Long Time Wins, is that compounding is a duration problem, not a rate problem. The gap between a good return and a great return matters far less than the gap between ten years and thirty. Money seeded early doubles, then doubles again, and the later doublings are the large ones, which is exactly why they only exist for the family that started.
The honest arithmetic is in The Big Income Myth. Take 50,000 Uganda shillings a month into an instrument yielding about 10 percent a year, within the historical range of SACCO dividends and money market unit trust yields, though yields move and nothing is guaranteed. Year one produces about 28,000 shillings of growth, a figure that convinces most people to quit. By year 10 the pot holds about 10.2 million, of which 4.2 million is growth. By year 20 it holds nearly 38 million, of which almost 26 million is growth, more than double every deposit you made. Same deposit, same rate. The only ingredient that changed was time. This is also why the principle extends beyond one lifetime: Advantage Compounds With Age shows what happens when a family gives money a 40-year view instead of a 4-year one.
People judge compounding by its first year and conclude it does not work for small money. The first year is the worst year by design; the curve is flat at the start and steep at the end, and quitting early means paying the boring price without collecting the exciting one. The related error is waiting for a big income before starting, which trades away the one input the floating-middle family holds in the same quantity as the wealthy one: time. Inflation will eat part of the real value, which is an argument for yield-bearing instruments over the mattress, never an argument for not starting.
Set one automatic monthly transfer this week, at an amount you could sustain in your worst month, into a yield-bearing pot such as a licensed unit trust or a verified SACCO. Then measure the streak, not the balance, because in the early years the streak is the real asset. LegacyPot is built around this: the pots module projects your pot forward in decades rather than months, so the family can see the year-20 number on the day of the first deposit, and children watching the chart learn the duration lesson earlier than their parents did.