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Saving money is a smart habit; you can watch your balance grow gradually. But what if we told you there’s a way to potentially grow your money even more, without doing anything extra? It might sound too good to be true, but that’s the power of compounding.
In this second article of our Beginner Investor Blog Series, you’ll discover how this simple yet powerful concept can help your money grow faster and why starting early makes all the difference.
Missed the first article? Read it here: Beginner Investor Blog Series – Guide to Investing in Ireland.
What Is Compounding?
Compounding is all about earning money on both your original investment and the earnings it’s already made. Over time, those earnings build on each other, helping your money grow faster, even if you don’t keep adding to it.
Imagine this: you’re at the top of a snowy hill. You pack a small snowball and start rolling it down the hill. At first, it grows slowly. But the more it rolls, the more snow it picks up, and the bigger and faster it grows.
That’s compounding.
Your money is the snowball. Time is the hill.
The longer your money “rolls” (stays invested), the more it grows because you’re earning money on your money and on the growth you’ve already made.
Why Time Is Your Best Friend
The earlier you start investing, the more time your money has to grow and accumulate interest. You don’t need a lot of money; you just need to give it time.
Let’s compare two people:
Let’s say both Anna and Ben decide to invest €100 per month, and they both stop when they reach the age of 65. The only difference is when they start. We’ll assume an average annual return of 5%, after fees and charges.
Anna starts at age 25
- She invests for 40 years. That’s 480 months of saving €100.
- Even though she only puts in €48,000 in total, her money has time to grow and compound.
Ben starts at age 35
- He invests for 30 years, 10 years less than Anna.
- He contributes a total of €36,000 over 360 months.
- But with less time for compounding to work, he ends up with just €83,200.
Although Anna saved only €12,000 more than Ben (€48,000 vs. €36,000), she ends up with almost double the final amount. Why? Because her money had 10 extra years to grow. And during those final years, compounding works the hardest.
That’s the beauty of compounding: the earlier you start, the less you have to invest each month to get ahead.
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Where You See Compounding in Action
Once you understand how compounding works, you’ll start to notice it everywhere in personal finance and investing. Here are some of the most common (and powerful) places where compounding works for you:
Pensions
Your pension is one of the clearest examples of how compounding works in real life. You make regular contributions, and in many cases, your employer also contributes to it. Over time, those contributions are invested and begin to earn returns—returns that then generate additional returns. The earlier you start, the more time compounding has to work its magic and grow your pension pot.
But that’s not all. Contributing to a pension also comes with tax relief, which means it actually costs you less than you think. And if you’re in an occupational pension scheme, your employer might be topping up your pension too, essentially giving you free money towards your future.
You can also make lump sum contributions through something called AVCs (Additional Voluntary Contributions). This can be a smart way to give your pension a boost, especially if you’re looking to increase your future income or reduce your tax bill.
Investment Funds
Investment funds are a way to grow your money over time. This could be a mutual fund, an index fund, or something called an Exchange-Traded Fund (ETF). You put your money in, and it’s spread across various investments, such as shares in multiple companies or a combination of stocks and bonds.
This is known as diversifying your portfolio, and it’s a smart way to mitigate risk. Instead of putting all your eggs in one basket, your money is spread out, so if one company doesn’t do well, it won’t affect everything you’ve invested.
As the fund makes money, that profit is automatically reinvested, meaning it buys more investments for you. Over time, those new investments can also generate additional income. That’s compounding at work, helping your money grow quietly in the background.
Regular Monthly Investments
When you invest a small amount each month, your money starts to build momentum. Each new contribution earns returns, and those returns accumulate over time.
Children’s Savings Plan
If you’re looking to give your child a strong financial start, a Children’s Savings Plan is a great option. You can invest a set amount each month, and over time, that money grows through compounding. It can be used for future expenses, such as third-level education, a first car, or even a first home. Starting early makes a big difference!
Investment Trust Fund
An Investment Trust Fund is a great option if you want to make a one-time investment for your child’s future.
Instead of saving monthly, you invest a lump sum using an investment bond held in a bare trust. This means the money legally belongs to your child, but you retain control over it until they reach a certain age.
It works like a long-term savings pot that has the potential to grow over time. Because the money stays invested, it can benefit from compounding, where the returns you earn start earning their own returns. Investment Trust Funds can also be tax-efficient, making them a smart and practical way to give your child a financial head start.
Compounding Works Best When You Leave It Alone
One of the smartest things you can do as an investor is… nothing. Compounding works best when you leave your money invested for at least 5 years. This gives it time to grow through market ups and downs.
Jumping in and out of investments too often can interrupt growth and reduce your overall returns. And there’s something else to keep in mind: exit tax.
Investment funds are subject to exit tax, which is a tax on the profit (the gain) when you cash out. The current rate is 41% (as of June 2025), and it’s automatically taken when you sell or after 8 years, whichever comes first. So if your money grows, a portion of that gain goes to Revenue.
There has been some discussion about reducing Ireland’s exit tax, which currently stands at 41% on profits from certain investment funds. While nothing has been confirmed yet, such a change would have a significant impact, leaving more of your returns in your pocket and making long-term investing even more rewarding. Let’s hope it becomes a reality, but for now, it’s best to plan with the current rate in mind.
That’s why it’s important to invest with a long-term plan, so your money has enough time to grow and still come out ahead, even after tax.
Small steps today can lead to big results tomorrow. Get a quote today!
What Happens to Compounding When the Market Crashes?
When the market crashes, it can feel like all your hard work is lost, but compounding doesn’t stop. The most important thing during a crash is to stay invested and give your money time to recover.
This graph shows some big drops in the stock market since the year 2000. You can see events such as the dot-com crash, the 2008 financial crisis, Brexit, and the COVID-19 pandemic. Each time, the market fell, but it then recovered and continued to grow.
Yes, the value of your investment might drop for a while. But if you don’t sell, your money stays in the game. When the market starts to recover (as it always has), your investment can grow again, and those gains will begin to compound as well.
Think of it like this: compounding is a long-term game. Short-term drops are just bumps in the road. The real power of compounding happens when you leave your money invested through the ups and downs.
Should You Use a Regular Savings Account or Invest Your Money?
A regular savings account (with interest) with your bank can be helpful, but not if your goal is to grow your money. The interest rates are usually very low, which means your savings grow very slowly (and may not even keep up with inflation).
If you’re looking to build long-term wealth, investing is generally a better option. However, savings accounts still have an important role. They’re ideal for your emergency fund or short-term goals because the money is easy to access when you need it.
With investments, we recommend holding your money for at least 5 years to allow it time to grow and weather any market fluctuations.
How to Take Advantage of Compounding
Compounding can quietly grow your money in the background if you give it time and consistency. Here’s how to make the most of it:
Start Early
The sooner you start, the more time compounding has to work its magic. You don’t need a lot of money to begin. Even investing €100 a month in your 20s or 30s can make a big difference by the time you retire. Starting later is still better than not starting at all, but time really is money when it comes to compounding.
Invest Regularly
Putting money into an investment account each month helps you build good habits and grow your investments steadily over time. It also means you’re adding to your pot, regardless of what the market is doing, which keeps your momentum going.
Be Patient and Stay Invested
Markets rise and fall, and it’s tempting to react. However, the best results are achieved when you leave your money invested for the long term. Even during dips, staying invested allows your money to recover and continue growing.
Make the Most of Tax-Efficient Accounts
In Ireland, using tax-efficient accounts, such as pensions or investment bonds, can amplify the compounding effect. Why? Because you get tax relief or defer paying tax until later—giving your money more room to grow in the meantime.
It’s never too early (or too late) to start growing your money.
Get a Savings & Investments Quote
Whether you’re just getting started or it’s time to review your existing investments, we’re here to help. At LowQuotes, we offer personalised savings and investment solutions tailored to your goals, budget, and comfort level.
Ready to make your money work harder for you? Get a free quote today and take the first step towards a stronger financial future.
Our next article in the Beginner Investor Blog Series will delve into risk tolerance. Stay tuned!
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