If you only remember one idea from finance, make it this one: money that earns, earns even more when you leave it to earn. Sounds twisted? Let’s take a snowball.
A ball that grows by itself
You make a small snowball at the top of a slope and give it a push. Each turn, it picks up a little snow. But because it’s a bit bigger each turn, it picks up a bit more snow than the turn before. At first you see almost nothing. At the bottom, it’s enormous.
Money works the same way. If CHF 1,000 earns 7% a year and you leave the gains in the ball:
after 10 years, you have about CHF 1,970;
after 20 years, about CHF 3,870;
after 30 years, about CHF 7,610.
Look closely: in the first 10 years the ball grew by less than 1,000 francs. Between years 20 and 30 it grew by more than 3,700. The last years do most of the work. That’s why starting early changes everything.
Why our brains don’t see it
Economists have measured that most adults seriously underestimate this growth. Our brains think in straight lines: “70 francs a year for 30 years makes 2,100 francs.” In reality, it’s almost three times more. This bias makes people start too late and save too little.
The good news: children don’t have this bad reflex yet. Show them the snowball early and they’ll understand it for life.
The snowball’s two enemies
Touching the ball: if you take the gains out every year, it stops growing.
Fees: high fees are like a slope with less snow. Over 30 years, an extra 1% in fees can eat a quarter of the result.
Try this tonight with your child
Get a bag of rice. On day 1, put 1 grain on a tray. Double it every day. How many grains after 10 days? (Answer: 512.) Ask your child to guess before counting: they’ll be amazed, and they won’t forget.
Further reading
Stango, V. & Zinman, J. (2009). Exponential Growth Bias and Household Finance. Journal of Finance, 64(6).
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Educational content, not investment advice. Returns are not guaranteed.