If you’ve ever spent any time thinking about millionaires and wondering how they got to be so rich, the answer for many of them is this: They employed a certain retirement savings hack by setting themselves up to benefit from compound growth.
Here’s a look at how compound growth works — and, importantly, how you might take advantage of the phenomenon, too, perhaps becoming a millionaire in the process.
Image source: Getty Images.
What is compounding?
Compounding is often referred to in the context of interest earned on an investment. So let’s review such an example. Imagine that you have $1,000 in a bank account that pays you 5% interest. (That’s a generous rate for these days — congratulations!) If you’re earning simple interest, you’ll collect $50 in your first year and $50 in your next year.
The story is much different if you’re earning compound interest. In year 1 you’ll collect the same $50, and your balance will increase to $1,050. In year 2, the 5% interest rate will be based on your new, bigger principal, so you’ll get $52.50, and your balance will increase to $1,102.50.
So with compounding, not only does your money grow each year, but the amount by which it grows also grows (unless, of course, you’re making withdrawals from the account).
Compound growth is also at work in the stock market. If you start out with shares of a company worth, say, $1,000 and the company increases its value over time, your shares’ intrinsic value will increase, too. If it pays out a dividend, as well, and you reinvest your dividends into more shares of stock, then those shares will, ideally, also grow over time, spitting out dividend income of their own.
Check out the table below, which shows how your money can grow over time at different rates if you sock away $10,000 annually:
|
Growing for |
Growing at 6% |
Growing at 8% |
Growing at 10% |
|---|---|---|---|
|
10 years |
$139,716 |
$156,455 |
$175,312 |
|
15 years |
$246,725 |
$293,243 |
$349,497 |
|
20 years |
$389,927 |
$494,229 |
$630,025 |
|
25 years |
$581,564 |
$789,544 |
$1.1 million |
|
30 years |
$838,017 |
$1.2 million |
$1.8 million |
|
35 years |
$1.2 million |
$1.9 million |
$3.0 million |
|
40 years |
$1.6 million |
$2.8 million |
$4.9 million |
Calculations by author via moneychimp.com.
Yes, $10,000 is not a small sum, but it’s not an impossible annual investment for many people. Per month, it’s $833. If you can’t sock away $10,000 per year now, you may be able to in future years, when you may be earning more.
And if you can invest $10,000 annually, take a moment to ask yourself whether that could be $12,000 or $15,000 or even $20,000 per year. (Two-income households, for example, can often sock away more.) Understand that your earliest invested dollars are your most powerful ones, as they have the most time in which to grow for you.
How to invest for growth
You might note that to get to some impressive sums, three key things are required:
- A meaningful annual investment amount
- A lot of time
- A good growth rate
If you have all three, your money can grow like gangbusters over time — though the biggest increases in your wealth will happen in later years. Thus, a lot of patience and sticking to the plan is required. You don’t need to become a stock market genius, either. Perhaps just stick with one or more solid low-fee index funds, such as these:
|
ETF |
Expense Ratio |
5-Year Avg. Annual Return |
10-Year Avg. Annual Return |
15-Year Avg. Annual Return |
|---|---|---|---|---|
|
Vanguard S&P 500 ETF (VOO 0.42%) |
0.03% |
16.27% |
12.43%% |
13.88%* |
|
Vanguard Total Stock Market ETF (VTI 0.42%) |
0.30% |
15.76% |
11.78% |
12.79% |
|
Vanguard Total World Stock ETF (VT 0.57%) |
0.06% |
14.04% |
8.90% |
9.50% |
Data sources: Morningstar.com, as of May 6, 2025, and Vanguard.com. *Since inception, Sept. 7, 2010.
Here’s a look at how broad these funds are:
Vanguard S&P 500 ETF: S&P 500 index funds are focused on 500 of the biggest companies in America, which together make up around 80% of the entire U.S. market.
Vanguard Total Stock Market ETF: This ETF encompasses nearly all of the U.S. stock market, spreading your money across more than 3,500 stocks, not just 500. It includes lots of small companies, too.
Vanguard Total World Stock ETF: This ETF encompasses just about all the stocks in the world — more than 9,700 stocks — all in one easy, low-fee investment.
You can aim for faster growth by including faster-growing ETFs or some individual growth stocks in your portfolio. But that will take more work and can be riskier. If you can be patient, you can likely build a lot of wealth with a simple, broad-market index fund. Many people are doing so right now, and you can be one of them.