When mentioning compound returns, many quote Albert Einstein as having declared compound interest to be “the most powerful force in the universe”. It is an urban myth, but it seems to have taken on a life of its own, so I had no choice but to also mention the quote in this particular post .

I am fully converted to the principle of compound returns, and having teenagers I have frequently tried to teach it to them. I recently saw a very convincing example of compound returns and the advantage of starting to save as early in life as possible. The example compares two people, each putting aside the same amount of money per year. However, person 1 starts as a 20-year old and stops as a 30-year old but keeps the savings account. Person 2 starts at age 30 and continues until he/she reaches the age of 60. Person 2 will have contributed 3 times as much to the savings or investment account as Person 1, but Person 1 ends up with more money.

My wife mentioned the example to some acquaintances the other day, and some of them just wouldn’t believe it. Whilst compound returns IS obviously true, I started doubting the example, maybe the gains from 10 years of early contributed savings did not surpass the gains from 30 years of savings, maybe I was the victim of yet another internet-circulated urban myth.

So I created a simple spreadsheet, and the results are just in:

• At a return of 3.6% and above, the total gains are higher for Person 1 than for Person 2.
• At a return of 6.3% and above, the total result is higher for Person 1 than for Person 2.

If you want to see for yourself, or play around with some of the numbers, you can download the spreadsheet here.