Why net worth grows slowly at first and then faster

Net worth grows slowly at first and faster later because of where the growth comes from. Early on, almost all of it is the money you put in; later, most of it is what the money already there produces, and the second source grows with the balance while the first stays the same. At $800 a month and a 6% return, the first year adds about $9,900, and $270 of that is growth. The tenth year adds about $16,900, with $7,300 of growth. The twentieth adds about $30,800, with $21,200 of growth, from the same $800 a month that was contributed in year one. Nothing about the household's effort changed. The balance did.

Two sources of growth, and one of them compounds

Each year, net worth rises by the contributions, the savings transfers and the debt principal paid, plus the return on the balance already there. Contributions are a flat line: $800 a month is $9,600 a year, every year, unless the household changes it. The return is a percentage of the balance, and the balance is the sum of every previous year's contributions and returns, so the return grows every year even when the rate does not.

In year one the balance is small and the return is a rounding error. By year ten the balance is over $100,000 and the return is most of a year's contributions. By year twenty the return is more than double the contributions, and the household's saving has become the smaller of the two sources. The line curves upward not because the household saves more but because the balance does.

A worked twenty years, at $800 a month and 6%

The contributions column never changes. The growth column goes from $268 to $21,169, and the share of each year's increase that comes from growth goes from 3% to 69%. The household that reads its net worth in year two and finds it discouraging is reading a line whose shape it cannot see yet.

The return is assumed at 6% a year for the arithmetic; real returns vary year to year and the shape is the same at any rate, steeper at higher rates and gentler at lower ones. The mechanism, growth on a growing balance, does not depend on the number.

Why the early years feel like nothing

In the first three years the household contributes $28,800 and the balance reaches $31,469: the growth is $2,669, less than four months of contributions. Every dollar of net worth is a dollar the household put there, visibly, and the effort-to-result ratio is one to one. There is no sign of the curve, and the temptation is to conclude that saving is a slow way to get anywhere.

The conclusion is wrong because the early years are the ones building the balance the later years grow on. Year ten's $7,312 of growth is a return on the $114,192 that years one through nine put there. A household that skips the slow years does not skip to the fast ones; it delays them by the same number of years.

What this means for the household's decisions

• Early on, contributions are everything. The rate of return barely matters when the balance is small; the amount saved is the whole line.
• Later, the balance is doing most of the work, and protecting it, by not withdrawing and not interrupting, matters more than a small change in contributions.
• Debt principal is a contribution, at the debt's interest rate, which is why paying down a card at 24% is a better "return" than any investment in the early years; see How paying off debt raises your net worth even when savings don't move.
• Time is the input the household cannot buy back. Every year the contributions start earlier is a year at the fast end of the table rather than the slow one.

Find where you are on the curve

1. Add up everything you have contributed to date, from the transfer records and the loan statements, or from a reasonable reconstruction.
2. Read the current balance of the savings, investment, and retirement accounts, plus the debt principal paid.
3. Subtract the contributions from the balance. The difference is the growth so far.
4. Divide last year's growth by last year's total increase. That share is the row of the table you are on, and it says how much of next year's rise will come from the balance rather than from you.

Common mistakes

• Judging the method by the first two years. They are the slow part by design.
• Reading a flat early line as a small contribution. It is a small balance; the contribution may be right.
• Interrupting the contributions in year eight to fund something. The balance that was about to do the work is the one being spent.
• Chasing a higher return in year one. The return is a rounding error on a small balance, and the risk taken to raise it is not.
• Crediting year fifteen's growth to that year's saving. It is the return on fourteen years of it.
• Expecting the table's smoothness. Real years are lumpy, and the shape appears over decades, not quarters.

Common questions

Why is my net worth growing so slowly? Because early on it is almost all contributions, and contributions are a flat line. The growth on the balance is small while the balance is small, and it becomes the larger source only after years of contributions have built the balance. The first years are slow by construction, not by failure.

When does net worth start growing faster? When the return on the balance approaches the yearly contributions, which at $800 a month and 6% happens around year ten, when growth is 43% of the year's increase. From there the growth's share keeps rising, to more than two-thirds by year twenty.

Does it matter what return I get? Less in the early years, when the balance is small, and more later. In year one, 6% versus 8% is a difference of a few dollars; in year twenty it is a difference of tens of thousands. The early decision that matters is the contribution; the later one is not interrupting the balance.

Does paying off debt follow the same curve? Yes, in reverse: the interest saved by each principal payment is the "return," and it shrinks as the balance shrinks, which is why debt payoff feels faster at the end. Debt principal at a high rate is the best early contribution a household can make.

Is this the same as compound interest? It is compound growth applied to a whole net worth rather than to one account: the balance produces growth, the growth joins the balance, and next year's growth is computed on the larger figure. The arithmetic is the same whether the growth is interest, dividends, or appreciation.

How Zypper handles this

Zypper draws the curve as it happens. Net worth is computed from every account, savings and investment accounts including 401(k), IRA and Roth IRA, HSA, and 529 plans on the asset side and loans and cards on the liability side, and charted over time, so the flat early years and the steepening later ones are the same line viewed at different points; the transfers into savings and investment accounts are recognized as movements between your own accounts, which is the contributions column, and the growth is the rest of the line's rise. See Net worth tracking and Supported account types for the details, or get started with Zypper to see where on the curve you are.