The 80/20 Rule of Compound Interest

 Here’s a cool fact I that read on Quora this week: Warren Buffett made 99% of his wealth after his 50th birthday. 

At first, this doesn’t seem to make any sense: Warren Buffett started investing at the age of eleven, yet he essentially made almost all his wealth after the age of 50.

Were the first 39 years of his investing timeframe just a waste of time?

Nope.

You see, that’s how compound interest works. Compound interest grows your wealth at a maddeningly slow pace at first. And then it speeds up. And it goes faster and faster and faster.

Most people don’t get this. In a world where everyone wants to make money NOWNOWNOW, few investors can appreciate the effects of the most powerful force in the world.

But for those of you who have the patience (and the guts) to stick it out, you can use this to your advantage.

Allow me to explain.

 

The Good Stuff Comes Towards The End

Let’s imagine that you invest $1,000 a month for 50 years at a 10% rate of return. Here’s how your wealth would grow:

The first 30% of your wealth would’ve taken you a looooong time to build, but the remaining 70% of your wealth took a lot faster. In fact, 70% of your wealth was built in the last 12 years – or 26% of your investing timeframe.

It’s the classic 80/20 Rule. (Okay, it’s not exactly 80/20, but it’s close enough).

Of course, not everyone can invest for a full 50 years. But the lesson I want you to take home is this:

When you invest for long periods of time, the vast majority of your wealth is going to come from just a small number of years – just like what Mr Buffett experienced.

 

The First 10% Is The Hardest

When I first started investing, I was pretty bummed out by my results. I diligently put in thousands of dollars a year, only to find that I earned just a couple of hundred bucks in dividends.

But after running the numbers, I realised that there was no way around it. I had to put in the reps. I had to spend years building my first 10% in order to get my next 90% in a much shorter timeframe.

Maybe you’ve followed my advice for a few years and you’re consistently investing a portion of your salary every month. It may seem like a slow, arduous climb, and you may sometimes wonder if you’re wasting your time.

But remember that like Warren Buffett, the seeds you sow now will quietly – but surely – compound.

If you have the patience to stick it out, you’re going to be amazed by what the power of compound interest can do for your wealth.

Some people may call you “lucky”, but you’ll know that it’s not magic – it’s math.