Reaching financial milestones through compounding with our fictional friend Wanda

The S&P500 index, which holds the 500 largest companies in the US in a certain proportion which we’ll discuss in another post, has, since it was launched in 1957, averaged about an 11.88% return. Let's say Wanda is 22 when she initially invests $1000 into the S&P. Since she just graduated from college and started working, she invests $500 a month, every month, never selling any of her position to maximize the power of her compounding.

After just over 9 years of contributing every month, if the market grows as it does on average (even considering there will likely be years much better and worse than that long-term average), Wanda’s portfolio will have grown to $100,000.

Wanda continues this to get to $200,000, in just another 4 years, 4 months—less than half the time it took to get her first $100,000 milestone.

Wanda wants to be a millionaire, and she can get there by the time she’s 46 if the market follows the average return it has gotten in the past into the future. But notice how, of the 25.5 years it takes, 9 of those were to get her from 0 to $100,000; the next milestone took less than half the time required to reach the first one, the third milestone took less than a third as long as the first, and so on.

This is the power of the exponential growth tendency of the market: you get returns on what you started with, and on your contributions, and, crucially, powering this whole machine, you also get returns on your returns.

Here's a table of the 10 $100,000 milestones to get to Wanda's first million dollars, with the milestone, and how long it took her to get there. In the chart, Wanda will start from nothing, invest $500 a month every month, and never sell. 

Milestone	How much Wanda contributed	How much compounding helped Wanda	The time it took Wanda to get there
$    100,000.00	$ 55,100.00	$   44,900.00	9 years and 2 months
$    200,000.00	$ 25,800.00	$   74,200.00	4 years and 4 months
$    300,000.00	$ 17,000.00	$   83,000.00	2 years and 10 months
$    400,000.00	$ 12,700.00	$   87,300.00	2 years and 2 months
$    500,000.00	$ 10,200.00	$   89,800.00	1 year and 8 months
$    600,000.00	$   8,500.00	$   91,500.00	1 year and 5 months
$    700,000.00	$   7,300.00	$   92,700.00	1 year and 2 months
$    800,000.00	$   6,300.00	$   93,700.00	1 year and 1 month
$    900,000.00	$   5,600.00	$   94,400.00	11 months
$ 1,000,000.00	$   5,100.00	$   94,900.00	10 months

We can draw some very important lessons from the chart:

1. Patience is key.
2. The market probably won't do exactly this, but this is the average performance over several decades, so we can be pretty confident that, in the long term, this will be about right.
3. The longer Wanda sticks to this strategy, the more heavy lifting compounding will do for her-- less than half of her progress toward her first $100,000 was due to compounding, but almost 95% of the progress between $900,000 and $1,000,000 was due to compounding.
4. Milestones are farther apart in the beginning and get closer together the more time that passes.