Although many people are familiar with the compound interest effect and long-term investing in broadly diversified ETFs and the associated strategies, not everyone manages to put these relatively simple steps into practice. Worse still, many get caught up in excuses and blame (“I don’t have any money to spare” or “My boss doesn’t pay me enough”) instead of taking control and creating a certain financial buffer for more ease and freedom in their lives. Once you have managed to save $100,000, statistically speaking, you are well prepared and can face any potential job change or setback with much greater ease.
We provide five reasons why, despite the well-known financial principles, achieving great wealth often remains out of reach for many.
The theory: compound interest and long-term investing
Many financial experts and influencers promote the idea that investing your money in broadly diversified stock ETFs over the long term and saving regularly through an automated savings plan can help you build significant wealth over time. Compound interest ensures that, as time goes on, not only the capital you invest but also the returns you have already earned will generate further returns. Calculations show that with an average annual return of 7% and a sufficiently long investment period, even small monthly amounts can grow into considerable sums. The effect increases exponentially over decades.
That’s the theory, but in everyday life, this financial math often poses a challenge for the general public that not everyone can master.
Obstacles on the path to prosperity
Perhaps the biggest mistake in financial planning is underestimating the factor of time. Classic examples often assume 30, 40, or more years of saving and investing. But in real life, many people start building their wealth systematically late in life—often after completing their studies, starting their careers, or starting a family. This means that, realistically, there are usually only 20 to 30 years of consistent saving. Early breaks (parental leave, unemployment, sabbaticals, illness) and early retirement further shorten this period.
However, the exponential effect of compound interest only becomes apparent after longer periods of time – those who start too late can hardly exploit its potential. The reason: In the first 20 years, very little happens in terms of asset growth. If you save $100 a month, you will have saved approximately $17,200 after ten years, around $50,000 after another ten years, and $117,000 after a total of 30 years. That’s certainly not a bad result, but the numbers really start to grow towards the end: after 40 years, the saver will have almost €250,000, and after 50 years, they will have over half a million euros.
In absolute terms, the really big returns only came at the end. This can be demotivating along the way if the actual goal is still a long way off – whether in financial or time terms.
The amount you save
It’s not just compound interest, but also how much you save that decides how much you can make. If you only invest $250 a month, you’re not likely to become a millionaire—even in 40 years. To reach this goal, savings rates of $500 or even $1,000 are more realistic. However, considering average income and living costs, only a few people can manage this. According to statistics, the average German saves about 11% of their net income. At this rate, it will take more than 40 years to reach a million. Higher savings rates are often only possible with considerable sacrifice or increasing earnings – which in turn influences discipline, salary development, and life events.
Expected returns vs. reality
The assumption of an average stock market return of 7% per annum is historically verifiable, but not guaranteed. Many investors do not invest rationally, sell during crises, or rely on risky products. High costs further reduce returns: actively managed funds, insurance policies, or excessive fee structures can reduce the effect by many thousands of euros in the long term. Those who want to take advantage of compound interest need discipline and a clear plan—both of which are rarely available on a permanent basis in practice.
The effect of inflation
Over many years, the purchasing power of our money decreases. Those who do not invest in inflation-protected assets lose real wealth despite their seemingly growing account balance. Even with a conservative inflation estimate of 2%, the purchasing power of the saved amount is halved in around 35 years. Anyone aiming for a million euros today needs 1.5 million euros, adjusted for inflation, to be truly financially secure later on.
Psychology as the biggest enemy
The human psyche stands in the way of rapid wealth accumulation. The first few years of investing usually bring little visible success. Those who clear their accounts after five or ten years in discouragement—for example, after a stock market crash—miss out on the crucial later years when the compound interest effect really takes off. Panic selling, lack of discipline, and life events often prevent the original strategy from being maintained.
Conclusion
In theory, financial mathematics, passive investing, and compound interest seem like surefire paths to prosperity. In practice, however, things look different: time, discipline, a sufficiently high savings rate, the right investment strategy, low costs, protection against inflation, and a stable psyche must all come together. However, life rarely follows a linear path—starting a family, illness, divorce, job loss, or lifestyle changes can all act as disruptive factors.
Those who start as early as possible, achieve high savings rates, remain disciplined, choose affordable products, and stick to their plan even in times of crisis have a very good chance of amassing considerable wealth. However, most people fail on at least one of these points. Not everyone will become wealthy, but many could still significantly improve their financial lives by acting wisely (see introduction).
