Compounding, explained without the hype

Compounding is the process of earning a return on returns you already earned. In year one you earn on your contribution. In year two you earn on your contribution plus year one's growth. Repeat that for twenty years and most of your balance is growth on growth rather than money you deposited.

A simple way to feel it: at a 7% average annual return, money roughly doubles every ten years. $10,000 left alone becomes about $20,000 after a decade, about $40,000 after two, and about $80,000 after three. Nothing changed except time.

This is why the boring advice — start early, contribute consistently, avoid interrupting the process — outperforms clever timing for most people. The first decade feels disappointingly slow. The last decade does the work.

Two things quietly destroy compounding: fees and withdrawals. A 1% annual fee sounds trivial but over thirty years it can consume roughly a quarter of your final balance. Selling during a downturn locks in the loss and removes the capital that would have recovered.

Inside super this is even more powerful, because the money is locked away for decades and the tax rate on earnings is capped at 15%. The compounding runs for longer, with less drag, than almost anything you hold outside super.

The practical takeaway is unglamorous. Automate contributions, keep costs low, choose an allocation you can hold through a bad year, and then leave it alone long enough for the arithmetic to matter.