The power of compounding: why starting early matters

Updated November 2026

Compounding means your returns start earning returns of their own. Given enough years, the growth on your growth ends up larger than everything you put in – which is why the year you start matters more than almost anything else.

Simple vs compound growth

With simple interest you earn only on your original amount. With compound growth you also earn on the interest or gains you have already made.

Take $10,000 at 5% a year for 30 years:

• Simple: $500 a year × 30 years = $15,000 of interest, for a total of $25,000.
• Compound: year 1 ends at $10,500, year 2 at $11,025 (5% of $10,500 is $525), year 3 at about $11,576, and so on. After 30 years: $10,000 × 1.05 multiplied 30 times = about $43,219.

Same rate, same money, same time – but compounding produces $18,219 more, and almost all of that extra appears in the later years.

The rule of 72

A quick way to estimate how long it takes money to double: divide 72 by the yearly return (in percent).

It is an approximation, not a law. It works well for returns between about 4% and 12% and assumes the same return every year, which real investments never deliver. It also works in reverse: at 3% inflation, prices double in about 24 years.

Early starter vs late starter

Two savers each put $200 a month into an RRSP or TFSA and earn 5% a year, compounded monthly (0.4167% a month), with deposits at the end of each month. Both stop at 65. No fees or taxes are included.

How the numbers are worked out: each $200 deposit grows by 0.4167% (5% ÷ 12) for every month it stays invested, and the table adds up all the deposits. The first deposit at 25 grows for 479 months; the last one, made at 65, does not grow at all. In spreadsheet terms, the value is =FV(5%/12, 480, -200) for the early starter and =FV(5%/12, 360, -200) for the late starter. For the third saver, the $31,056 built up by age 35 then grows for another 30 years with nothing added: $31,056 × 1.004167 multiplied 360 times ≈ $138,752.

What the table shows:

• The early starter puts in only $24,000 more than the late starter but ends up with $138,752 more.
• The saver who stops at 35 contributes a third as much as the late starter yet ends up with more than 80% of the late starter's balance.
• To catch up, the late starter would need to save about $367 a month instead of $200 – nearly double.

Fees compound too

A yearly fee works like negative compounding. On $10,000 earning 6% before fees for 25 years, a 0.25% fee leaves about $40,458; a 2% fee leaves about $26,658. See the full example on the mutual funds page.

Why registered accounts help

Tax interrupts compounding. In an ordinary taxable account, interest is taxed every year, so only the after-tax part keeps growing. At a 30% tax rate, a 5% interest return becomes 3.5% after tax. Over 30 years, $10,000 grows to about $28,068 at 3.5%, compared with about $43,219 at the full 5% inside a TFSA or RRSP. The TFSA keeps all of it; the RRSP is taxed only when you withdraw, so the whole balance compounds in the meantime. That is the main reason to fill registered room before investing in a taxable account (see TFSA, FHSA and RESP).

Don't forget inflation

A balance of $305,000 in 40 years will not buy what $305,000 buys today. At 2% inflation, $100 today buys only about $61 worth of goods in 25 years ($100 ÷ 1.02 multiplied 25 times); at 3% it is about $48. When you project savings, either use a return after inflation (for example 5% minus 2% = about 3% "real") or remember to shrink the future figure.

What to do with this

• Start now, even with a small amount; you can raise it later.
• Automate monthly contributions (see dollar-cost averaging).
• Keep fees low – they compound against you.
• Reinvest distributions instead of spending them.
• Run your own numbers in the RRSP calculator or retirement calculator.