How Young Canadians Can Build Wealth with Compound Interest: Why Starting Early Matters

For many Canadian families, financial education isn’t just about passing down wealth. It’s about passing down wisdom. And one of the most powerful lessons you can share with your children or grandchildren is this: time is the most valuable asset in wealth building. 

The principle of compound interest is simple in theory, but profound in practice. It rewards those who start early. For young adults just beginning their financial journey, understanding this concept can be a game-changer.  

Why Young Adults Have the Advantage 

Many young Canadians are still finding their financial footing. They may be managing student loans, rent, or their first full-time job. But this stage of life offers something older investors don’t have as much of: time. Even small, consistent contributions to a registered savings account can grow significantly over the decades, especially when reinvested and left untouched. These registered accounts also offer tax advantages that can further accelerate growth.  

What Is Compound Interest? 

Compound interest is the process of earning “interest on interest,” where your returns are reinvested and begin generating their own growth. Unlike simple interest, which only applies to your original investment, compounding accelerates wealth-building over time as both your principal and accumulated gains continue to grow.  This compounding effect can come from different types of returns, depending on what you invest in: 

• Reinvested interest payments from savings accounts, GICs, or bonds. 
• Capital gains that stay in your portfolio when your investments grow in value. 
• Dividends reinvested through Dividend Reinvestment Plans (DRIPs), which automatically buy you more shares. 

In each case, your money doesn’t just sit still; it keeps generating more growth on top of what you’ve already earned. Over time, this creates a snowball effect where your savings grow faster the longer they stay invested.  

Compound Interest in Action 

To see the power of compound growth in practice, let’s compare two investors. Emily begins investing at age 25, contributing $5,000 every year until age 65. Over those 40 years, she deposits a total of $200,000. On the other hand, Alex waits until age 32 to start, contributing the same $5,000 annually, but for 30 years, for a total of $150,000. Assuming a 7% average annual return through a mix of growth, dividends (reinvested through DRIPs), and interest, Emily’s portfolio grows to about $1,068,048 by age 65. However, despite steady contributions, Alex’s portfolio reaches only about $505,365. In other words, Emily contributes just 33% more than Alex, but ends up with more than double his portfolio value. This example shows the dramatic impact of starting early: the extra decade of compounding gives Emily a huge advantage. Of course, it’s important to note that these figures don’t factor in inflation, which reduces future purchasing power, though the lesson is clear: time is the most powerful ingredient in wealth building.  

Teaching the Next Generation to Think Long Term 

It can be difficult for young adults to see the value in long-term investing when short-term goals like travel or everyday expenses feel more immediate. Here are a few ways to help make the concept more relatable: 

1. Show, Don’t Just Tell 

Use online compound interest calculators or mobile apps to illustrate how modest investments today can grow into significant future wealth. 

2. Encourage Automation 

Automatic contributions to a registered account make investing a habit. Even small amounts build consistency and reduce the temptation to delay. 

3. Offer Matching or Incentives 

If you're in a position to help, consider matching their contributions or offering a one-time investment incentive. It reinforces the value of saving early. 

4. Create a Culture of Financial Openness 

When money is part of regular, judgment-free family conversations, young adults are more likely to ask questions and make informed decisions. 

Closing Thoughts: The Legacy of Financial Literacy 

As a successful business owner or high-net-worth Canadian, you know firsthand the benefits of smart financial decisions over time. Imagine if your children or grandchildren understood those lessons in their twenties. 

Compound interest is more than a financial concept. It is a mindset of patience, consistency, and forward thinking. Teaching the next generation to use time as a tool is one of the most impactful financial lessons you can offer. 

If you're wondering how to help your family incorporate these strategies into their long-term plan, reach out to your advisor.