How compounding works is one of those ideas that sounds simple when you first hear it and takes a while to sink in.
We learned about compound interest early on when we started reading about personal finance, and our first reaction was roughly: okay, your money grows over time, got it. The more we looked into it, the more we realized we had underestimated how much it matters, especially for people in medicine who start their careers later than almost everyone else.
So here is our attempt to explain how compounding works in a way that makes it click.
How Compounding Works, in Plain Terms
The basic idea is straightforward. When you invest money, it earns a return. Then that return gets added to your total, and next time around, you are earning a return on a slightly larger amount. Over and over again, year after year, this builds on itself.
People make a big deal about it because of what happens in year twenty or year thirty. Year one and year five look unremarkable. The growth starts slow and then gets hard to wrap your head around.
A simple example helps. Say you invest $10,000 at an average annual return of 7%. After ten years you would have around $19,700. After thirty years that same $10,000 grows to about $76,000, without you adding a single dollar. [1] The longer you leave it, the bigger the effect.
Why This Hits Differently for Future Doctors
This is where it gets a bit uncomfortable for those of us in medicine.
Most people who go straight into a career after a four-year degree start working around 22 or 23. They have roughly four decades of compounding ahead of them before retirement. Medical students who complete residency often start their careers at 30 or later, sometimes closer to 35 after a fellowship. That is nearly a decade of compounding we don’t get in the same way. [2]
That gap matters more than it might seem. Money invested in your twenties is worth dramatically more at retirement than the same amount invested in your thirties or forties, purely because it has longer to grow. [3] Over a career, the same contributions started earlier can come to hundreds of thousands of dollars more.
We aren’t saying this to be discouraging. Understanding the gap is the first step to doing something about it.
Compounding Works Both Ways
It took us a while to appreciate that compounding applies to debt as well as investments.
When you take out a student loan, interest starts accruing. If that interest isn’t paid down, it gets added to your principal, so you end up paying interest on your interest. It is the same mechanism as investment compounding, working against you. [4]
For medical students carrying large loan balances through years of school and residency, this adds up. A $200,000 loan at 6% interest can grow to well over $250,000 by the end of residency if nothing is paid on it. That is why getting on top of debt early matters as much as starting to invest.
So What Can We Actually Do About It
We can’t fully make up for a late start, but we can limit the damage.
A few things come up again and again when we read about this.
The first is to start earlier than you think you need to. Even small amounts invested during medical school or residency get more time, and time is the ingredient that matters most. Some people assume investing isn’t worth it until they earn a real salary. The math says otherwise.
The second is to avoid lifestyle inflation when the income finally comes. The years right after residency are the most important window for building wealth. If you immediately scale your spending up to match your new salary, you lose the chance to use that income to make up for lost compounding years. [2]
The third is to keep fees low. Investment fees eat into returns quietly, and over decades that cost compounds just like everything else. Low-cost index funds help preserve as much of your return as possible. [5]
The Bottom Line
Once you see how compounding works, you wish someone had explained it sooner. The longer your money has to grow, the more the math works in your favour. For future doctors, time is the one resource we can’t get back, so starting earlier, even in a small way, matters more than most of us realize.
We are still early in this ourselves, but this idea changed how we think about money and about getting started sooner.
References
- Fidelity Investments. (2023). The power of compound interest. https://www.fidelity.com/learning-center/personal-finance/compound-interest
- Dahle, J. M. (2014). The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing. The White Coat Investor, LLC.
- American Medical Association. (2024). Why physicians need to start saving early for retirement. https://www.ama-assn.org/medical-residents/medical-residency-personal-finance/why-physicians-need-start-saving-early-retirement
- Federal Student Aid. (2024). Understanding interest and fees. U.S. Department of Education. https://studentaid.gov/understand-aid/types/loans/interest-rates
- Bogle, J. C. (2007). The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns. John Wiley & Sons.