the process

the power of compounding — in our incomes

people in the pf world talk a lot about the power of compounding over time, and we want to talk about how this power has been made evident to us most of all: in our incomes. as our last post showed, we’re definitely earning (though not spending) plenty now, enough that we are able to save up relatively quickly for early retirement.

but it wasn’t always this way. and for those of you who are early in your careers, and wondering how you’ll ever save up enough to meet your financial goals, we have this advice: be patient, and stick it out. time is on your side.

our career paths have both been a little bit throwback, in that we’ve each stuck it out long-term with our employers, one of us since college, and the other since just a year out. (we’re 35 and 38 now, so we’re talking 13+ years each.) we are both consultants, which is a vague descriptor, but it essentially means that people or companies hire our companies to do work for them, and then we are the ones who do the work. we’re both good at our jobs and have advanced over time. but lest you think we have always been high earners, consider this: we each started out at a salary under $40,000 a year (one of us well under that), and this was while living in very expensive cities. in fact, back in those early days, we both often struggled to afford groceries, and for sure struggled to dress professionally, and we ran up significant credit card debt just getting by. (and, let’s be honest, probably paying for some happy hour drinks, too.) we didn’t make all the best financial decisions in those days, but we didn’t make horrible ones either.

over time, staying in those same jobs, and getting consistent though never huge pay raises, our income has gotten to a point where we can live extremely well on a tiny fraction of it. that’s without job hopping, without ever asking for a raise, and without switching to a higher earning industry. not because we’re super awesome. just because of the power of compounding and time. if we’d job hopped, there’s a good chance we could be even farther ahead of where we started, though in our case we think we’ve both been rewarded a bit for loyalty.

of course, at the same time, we’ve seen the power of compounding in other aspects of our finances, namely our 401(k) accounts and our taxable investments. we know that millennials were deeply scarred by the 2008 financial crisis, as we all were, and we were also deeply scarred by the dotcom bust — that affected our returns very early on in our careers, not to mention it made it pretty tough for one of us to find a job and necessitated a cross-country move to escape tech-land. but still — despite going through two major market crashes within the timespan of our careers, and starting out with modest salaries, we’ve gotten to a place where we feel beyond amazing about where we are and where we’re headed.

we offer our story as a lesson to those who look around the pf/fi/re space and think, “wow, look at all of these software engineers. they all make mega money. that’s why they can afford to retire early, and i will never reach that.” it’s just not true. trust us — we know what it’s like to be starting out and feel like you’ll never reach your goals. we were watching home prices climb mighty fast in the 2000s, after all, and thought we’d never be able to buy. then the market correction happened, and we’ve since bought three homes — our first condo, our current home, and our rental property. and we watched those measly looking dollars go into our 401(k)s, thinking “how will we ever get enough to retire?” but magically, over time, those numbers grew and grew, both as we could afford to put more away, and as compounding did its job.

there seems to come a day when your finances reach a tipping point — which could be earning enough to comfortably live below your means and accelerate your savings, or could be the point when your investments start to make more in compounding than they do from your contributions — and when that happens, things change fast. your goals get closer quickly, and it’s suddenly easy to forget those years of slogging, when progress feels slow and incremental. as long as you keep investing steadily, take care of your debt quickly, and stay committed to increasing your worth in your career, it will happen.

are you in the early stages of your career or your investing life, and feeling like your goals are out of reach? or are you past the tipping point, and now amazed at how things are falling into place? we’d love to hear your story!

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30 replies »

  1. Great job at explaining how compound interest is key to building a solid nest egg. I’ve been with only three employers in the twenty eight years I’ve been working. I would only accept positions that offered a lucrative salary and a full benefit package. I never second guessed maxing out the 401K plans, and would always take full advantage of the company match. It builds faster than most people think.
    Our story is a little different though. We are a decade older than you and purchased our home at the height of the housing market. We watched our home value plummet by $150K during the recession. My heart broke as I watched amazing real estate deals pop up that we were unable to take advantage of. Many people in our neighborhood chose to walk away where we decided to stay put and wait it out. Now that the home value has recovered, I’m glad we did! Great post!

  2. Never before I looked at compounding income… It is a refreshing view. It also applies to us. We have similar ages, and we have reached a point where the savingsrate is quite nice. it could have been higher, but the Miss now only works 4 days out of 5. Somehow, that is freedom as well!

  3. I love how you reminded us and reassured readers that we all start somewhere and it is usually not at the top. Loved this post.

  4. My problem is that I am not very patient! Waiting is hard. Which is why your post is a nice reminder for me, since I’m at the beginning of my new career (3 years in) and already feeling listless. I’m not 100% new to investing, but I’m new to investing for passive income, and I’m certainly new to investing in another country. Early retirement feels daunting at times, but I’m hoping that our passive income will come in soon and give us (me!) a pick me up. Like hey, I’m here to help you achieve your goals – go to sleep now! :)

  5. Great post! I am definitely in the early stages of investing (started at 23, now I’m 25). I have my systems in place and invest through employer sponsored 401(k) with Vanguard, and different goals financial goals & Traditional IRA through Betterment. It allows for me to have more choices in asset allocation. The couple key things I’ve learned when investing are to take your emotion out (which is tough since I graduated high school in 2008!), diversify, compound interest is your friend, and set it and forget it. Every now and again I check in and I’m actually blown away by how much is saved in this short time frame. I know I’m feeling great now, I just anticipate the next correction. If I just steer the course and ride it out, everything should be okay! Much better than leaving money under the mattress where it loses it’s value. :)

  6. I definitely have to agree with you on the compounding of income. I’ve been in the workforce for a little over 5 years and have seen some relatively large increases in my income. I’d rather increase my income than decrease my spending anymore than I already have. I haven’t been in the game long enough to really appreciate the compounding of my investments, but I plan on being around long enough to see it through :)

  7. If you are a dividend growth investor you know all about the magic of compounding and what it can do for a passive income stream over time. For most, the power of compounding is lost as it often starts out very slow to make any real difference. The secret is to remain consistent with your investments and have patience. Thanks for sharing.

  8. We started our careers pretty late all things considered. It’s allowed us to completely evade student loan debt, but I’ve wondered about the trade off before. Could we be making oodles more money right now if we had just started at the traditional age of 21, taking on massive loans? I don’t know if there’s a right answer. I wish we had been able to do both: go to college traditionally, and do it debt free. If I knew then what I know now, I might have been able to pull it off.

    But hindsight is always 20/20. :)

    • As you said, impossible to know! We also feel like we’ve been working forever, and sometimes wish we hadn’t gone straight to work. So that’s the other side of it. Who knows!

  9. Whoa! A post like this is what excited me so much to read your blog from the very beginning. Great stuff and perspective! I think that’s the greatest variable for my wife and I personally in our FIRE journey – estimating pay increases which we know will accelerate our timeline. Just a phenomenal perspective from someone a bit further along in the journey – thank you!

    • Thanks, Todd! And if you really read from the beginning, you deserve a medal… or at least a beer or a bowl of ice cream or something. ;-) Our pay increases have DEFINITELY been the biggest factor in our success, even though they’ve never been a huge percentage… they still add up, though!

  10. Hi,
    I am also reading from the very beginning, as I don’t want to miss out on any of your posts. Love seeing your journey and how you brought your dreams to fruition. My husband and I are at the very beginning of investing and building wealth and FI truly feels very far off and the going incredibly slow. So thanks for the encouragement and perspective :)
    All the best from Austria, and congratulations on reaching your huge goal!

    • Hi Elisabeth — Thanks so much for reading back from the beginning! ;-) The journey definitely feels slow in the beginning, but it will absolutely start accelerating, and by the end it feels crazy fast. So stick with it!

      Thanks for the well wishes! Hi to you across the Atlantic! :-)

  11. I’m yet another reader going back to the very beginning of the posts. Note to self; I should comment on one of your first posts so they’re not so lonely.

    For us, we’re at the tipping point/financial awakening. A financial planner at my wife’s work (free as part of her employment) really opened our eyes a bit as to how we were doing in the spring of 2018. Not fully, but enough to tell me that I was completely believing “when your finances don’t fit into the standard box // lies the financial industry tells us” instead of thinking for myself. After a spring and summer reading of quite a few FIRE blogs, the stage is now set!

    Also, I’m very much enjoying reading these older posts. Many of your thoughts from then are the ones we’re having right now. While our plans are different (we want semi-retirement as we enjoy the structure of our jobs for the most part and the health insurance is just too good to pass up when I have a chronic disease) the goal of financial independence is the same. And it’s possible some new health care options, which feel more solid, will arrive and perhaps the structure of our jobs won’t be as fun 7 to 11 years from now.

    Thank you for the blog. Love it. Still looking forward to getting the book. My wife and I will be reading and discussing it as soon as we can.