The concept of the wealth snowball is well-known. As your savings compound, your wealth builds faster and faster, until it becomes an unstoppable force. I’d dare say that at least 50% of the reason the rich get richer, is because of the wealth snowball. But how long does it take before the wealth snowball really kick in?
What is the Wealth Snowball?
If your are not familiar with the concept of the wealth snowball I’d like to refer you to two great articles from the Money Boss blog and from the Sure Dividend blog. An often cited illustration of the wealth snowball at work is how Warren Buffet built his wealth:
As Warren Buffet continued to make investments, his wealth grew exponentially.
- Age 11, Buffett had saved $120.
- Age 21, Buffett had a net worth of $19,738.
- Age 26, Buffett was worth $140,000.
- Age 30, Buffet had a net worth of $ 1 million.
- Age 40, Buffett had more than $25 million.
- Age 50, Buffett had a net worth of more than $150 million.
- At the ripe age of 60, Warren Buffet crossed the billion dollar mark.
- By age 60, Buffett had become a billionaire.
Today, Warren Buffett is 86 years old and worth almost $ 79 billion dollar.
That is the wealth snowball at work, notice how much faster and faster Warren accumulated his wealth. Like a snowball rolling downhill getting bigger and bigger.
How long does it take before the wealth snowball kicks in?
Well, Steven… that is a really stupid question. The wealth snowball starts rolling immediately! As soon as you start putting money aside and investing it it starts rolling. Only it rolls really really slow at first.
A better question would be: “How long does it take for you to notice the effect of a wealth snowball”?
How could I answer that question?
Imagine that every month you save $100. And this money generates a steady return. I would argue that you can really start to feel the wealth snowball as soon as your investment generates more money than you are adding to it by saving. In this example: as soon as your investment generates more than $100 per month, your wealth snowball kicks in.
Of course, this would depend on the interest rate at which you invest, but the curve would look something like this.
Let me use an average market rate of 7%. (I will not debate today whether that is aggressive or not, but allow me to make my point 🙂 ).
At an average market growth rate of 7% it takes about 10 years for your wealth snowball to really kick in. It takes about 10 years of consistently investing in the market, before those investments generate more than you put into it yourself. If you manage to up your rate of return to 10%, your wealth snowball will start to show after 7 only 7 years.
How long does it take for my wealth snowball to generate multiples of what I put in?
I can here you thinking. How long would it take for that wealth snowball to generate $200, $300 or more if I consistently continue to set aside $100 in investments monthly?
Or otherwise stated: how long does it take for the debt snowball to generate multiples of what I put into my investment on a monthly basis?
At a 7% rate of return the graph would look somewhat like this:
This is where we see the magic of the wealth snowball really at work. It takes about 10 years for the snowball to manifest and return more than you put in. Keep that rhythm up for 34 years and your investments will be generating 10 times what you are putting in. See how fast that increase is moving upwards as of year 30? Each single year you are adding another multiple.
How do I make the wealth snowball work for me?
That answer is simple: invest consistently over 10 years or more and it will start rolling faster and faster. It really is that simple. Simple, but not easy :-).
What about you?
Any thoughts or comments on the wealth snowball ? Would love to read you in the comment section!