At What Dollar Level Does the $$ Start Compounding Fast?

[oldtoyota]

I have heard a few people reference a dollar level at which the money will appear to compound quickly because there is more of it to compound. Is there a general rule of thumb as to when (at what dollar level) this happens?

Modified: To clarify that it seems like it's compounding faster as opposed to really compounding faster.

[cats]

Seems like one of those things that's highly dependent on what "fast" is defined as. 

After sitting here scratching my chin for a bit, I think that one possible definition would be the point at which the interest/returns outstrips the amount of money that you are able to put in.  i.e. your "savings" by virtue of having saved in the past are more than your savings in the present (so, if I can save $500/yr, when will my annual investment returns exceed $500).


If you assume a constant 8% return rate and the same amount saved (put in by you, not the compounding part), the crossover point seems to be around 9 or 10 years, if my math is correct.  Of course, some people will (we hope) be able to increase their savings amount year by virtue of pay increases, more optimized living, etc.  Others may see decreases--my partner and I are rocketing along right now, but if we start a family in the next year or two...that will decline (I'm hoping that by the time we get to that point, the returns on investments will have risen enough to make up for the money we will have to redirect to childcare...so there's another threshold for "fast").  And of course you won't get a constant return from year to year.

If you're looking for an absolute dollar amount, it's going to vary a lot from person to person, as people will probably define "fast" in terms of their own situation, income, expenses, etc.  It also depends a lot on how the markets are going.  For example, in some ways I have hit a real crossover point this year because my investment portfolio has expanded hugely.  And to some extent this expansion is definitely due to massively increasing earnings and, by extension, savings.  BUT, I know that the stock market has also been going up like gangbusters, so some of my perception is being influenced more by the timing than by the amount of money I've gotten stashed away.

[dragoncar]

Unfortunately, I believe that point is long after FI.

It will seem to compound very fast once investment income exceeds expenses

[prodarwin]

Umm... it compounds at the same rate the whole time.

[chasesfish]

Seems like one of those things that's highly dependent on what "fast" is defined as. 

After sitting here scratching my chin for a bit, I think that one possible definition would be the point at which the interest/returns outstrips the amount of money that you are able to put in.  i.e. your "savings" by virtue of having saved in the past are more than your savings in the present (so, if I can save $500/yr, when will my annual investment returns exceed $500).
 

I was wondering how to answer, but what he said.  I finally hit the point where earnings are exceeding what I can put in, so I would consider that fast.

[grantmeaname]

Umm... it compounds at the same rate the whole time.

Yep, because math. There's no magic or secret sauce. Just multiplication.

[brewer12345]

Perception-wise, it seemed to me that once I hit 500k or so it became clear that it would be hard to screw up so badly that I would never make it to FI.  Of course, its painful to revisit that 500k level when the market crashes.

At this point, the portfolio typically outstrips what I earn after taxes in any given year.  It produces a consumption distortion, though.  Its hard to spend time deciding whether or not to make a $100 purchase when the portfolio could fluctuation by 50 times that much in a day and I would not regard it as a big move.

[oldtoyota]

Unfortunately, I believe that point is long after FI.

It will seem to compound very fast once investment income exceeds expenses

Thanks. This is helpful!

[oldtoyota]

Umm... it compounds at the same rate the whole time.

Yep, because math. There's no magic or secret sauce. Just multiplication.

Yes. Of course. I don't think you understood what I wanted to know. No worries though. =-)

[FiveSigmas]

At this point, the portfolio typically outstrips what I earn after taxes in any given year.  It produces a consumption distortion, though.  Its hard to spend time deciding whether or not to make a $100 purchase when the portfolio could fluctuation by 50 times that much in a day and I would not regard it as a big move.

Yeah, that's a good point, and I think it's another excellent reason not to pay much attention to the stock market on a day-to-day basis.

[grantmeaname]

So you could take a table in excel - here's what $10,000 a year does at 7% - and then look at where you feel like it's substantial. For an arbitrary cutoff, 12 years is the point in which 7% returns can be expected to compound on themselves faster than your original contribution increases the balance. But it's really kinda continuous.
$10,000.00
$20,700.00
$32,149.00
$44,399.43
$57,507.39
$71,532.91
$86,540.21
$102,598.03
$119,779.89
$138,164.48
$157,835.99
$178,884.51
$201,406.43
$225,504.88
$251,290.22
$278,880.54
$308,402.17
$339,990.33
$373,789.65
$409,954.92

As you continue to be a badass in your life your expenses will effortlessly drop, too, so the same amount of money goes further. From MMM's example I'd say that can be expected to continue after retirement.

[tooqk4u22]

Seems like one of those things that's highly dependent on what "fast" is defined as. 

After sitting here scratching my chin for a bit, I think that one possible definition would be the point at which the interest/returns outstrips the amount of money that you are able to put in.  i.e. your "savings" by virtue of having saved in the past are more than your savings in the present (so, if I can save $500/yr, when will my annual investment returns exceed $500).
 

I was wondering how to answer, but what he said.  I finally hit the point where earnings are exceeding what I can put in, so I would consider that fast.

I agree with this, I mean if your investments are growing by themselves more than you can actually put in...it feels magical.

Perception-wise, it seemed to me that once I hit 500k or so it became clear that it would be hard to screw up so badly that I would never make it to FI.  Of course, its painful to revisit that 500k level when the market crashes.

At this point, the portfolio typically outstrips what I earn after taxes in any given year.  It produces a consumption distortion, though.  Its hard to spend time deciding whether or not to make a $100 purchase when the portfolio could fluctuation by 50 times that much in a day and I would not regard it as a big move.

But this too is all too real, because when your investments go down $30k in a day it sucks, especially if you are expect to save $30k or less in that year.  Sure your buying lower and it is a function of the markets, but it still hurts the psyche....that is why it is best not look at your world that often.

[plantingourpennies]

When the portfolio can easily fluctuate by more than the amount that you can put into it.

We track out new worth monthly and put away about 7k a month into the market...soon we'll get whipsawed on a down month, but also have some months with silly gains as well.

At this point, you really have to wonder if there is any value of tracking the NW on a monthly basis...

Best,
Mr. PoP

[brewer12345]

But this too is all too real, because when your investments go down $30k in a day it sucks, especially if you are expect to save $30k or less in that year.  Sure your buying lower and it is a function of the markets, but it still hurts the psyche....that is why it is best not look at your world that often.

I suppose it depends on your perspective and where your asset level is in relation to your needs.  I have spent much of my career in and around the securities markets through some really awful times.  I had to mark my portfolio daily to understand where I was in relation to target allocations and my goals.  After watching ugly 5 figure down days, the kerfluffles that go on in today's relatively benign environment are hard to get lathered up over.  It also helps that I am over where I need to be to bail on the day job by a nice little margin.

[oldtoyota]

Everyone--You answered my question. I was curious why people say it seems like compounding happens faster when you have more money, and you satisfied my curiosity. For that, I thank you!

[MrsPete]

This isn't a hard-and-fast rule, but I remember years ago a slightly older friend -- actually, my husband's first boss -- told him, "Your first $100,000 is difficult to save, but once you pass that mark things start moving faster."  We found that was true for us.  The first $100,000 seemed to take forever. 

Of course, a couple other things happened at about that same time:  That was also about the same point we saw a real increase in our salaries.  That was also about the same time our house payment went from being real money to being very easy to pay.  That was also about the same time we had our house completely furnished (no more saving for a bedroom set or a washer/dryer).  So, really, a number of things came together all at once, and even though it was about the time our second child was born -- so our expenses went up -- we suddenly had more money in our checking account and were able to save more easily.  I don't think this is unusual. 

[dragoncar]

Yes, the corralary is that it becomes extremely depressing to lose years of savings in a volatile market (no or negative progress despite regular contributions)