“Compounding is a miracle when working for you, but deadly against you.”
A millionaire founder I once spoke to - who made his fortune selling mobile phones before most of us even knew what “4G” meant - shared that line with me. And it’s stuck ever since.
He followed it up with something even more powerful:
“Everything in finance is about different rates of change.”
That’s it.
Not budgeting hacks.
Not timing the market.
Not predicting the next boom.
Understanding how different things change over time - and positioning yourself on the right side of those changes.
Because different things in your life grow at very different rates.
- 🛒 Groceries grow at the rate of consumer inflation (CPI)
- 💼 Wages grow at the rate of wage inflation (WPI)
- 🏘️ Property grows at the rate of housing price growth (HPI)
And those rates are not the same.
That difference is where wealth is either built — or quietly eroded.
What Is Inflation, Really?
Inflation simply means your money loses purchasing power over time.
Another way to say it:
A dollar today buys more than a dollar next year.
If inflation is 3%, something that costs $100 today will cost $103 next year.
It doesn’t mean the product changed.
It means the value of money changed.
The Reserve Bank of Australia (RBA) aims to keep inflation between 2–3% per year. The idea is that modest inflation supports stable economic growth.
But when inflation rises too quickly - like when it peaked at 7.8% in December 2022 - the erosion becomes very noticeable.
A Simple Example of Compounding (The “Deadly” Side)
Imagine:
- 2L of milk and a loaf of bread costs $10 in 2025.
- Inflation is 3% per year.
Here’s what happens:
- 2026 → $10.30
- 2027 → $10.61
- 2028 → $10.93
- 2029 → $11.26
Notice something important:
The dollar increase gets larger each year.
That’s compounding.
Inflation isn’t linear.
It builds on itself.
And if your money is sitting idle - it’s compounding against you.
But Inflation Isn’t One-Size-Fits-All
Here’s where most people get confused.
There isn’t just “inflation.”
There are multiple rates of change happening simultaneously.
1. Consumer Prices (CPI)
This measures the cost of everyday goods and services:
- Groceries
- Rent
- Transport
- Gym memberships
- A pint at the pub
The Australian government targets around 2–3% per year.
This is why assuming 2.5% long term inflation is generally ok for planning general living costs.
2. Wages (WPI)
Wage inflation measures how much pay for the same job increases over time.
For example:
- A graduate role that paid $50k ten years ago might now pay $65k.
- A barista role that paid $25/hour might now pay $30/hour.
That’s not because of promotions. That’s market-wide wage growth.
The government’s (treasury's 2023 Intergenerational Report) long-term target for wage growth is 3.7% per annum and Canwi is required to use this as the 'default' assumption. Because our model is a projection of the future, using the 3.7% default wage growth assumption effectively assumes the government will achieve its long-term wage target - something that historically has rarely occurred over sustained periods.the chart below shows in the red box the Wage Growth % with the red box denoting points below 3.7% wage growth.
And when inflation surged in 2022–2023 (5.1% and 7%) while wages grew at 2.4% and 3.7% respectively, real wages went backwards - meaning people earned more dollars, but those dollars bought less. Setting the REAL purchasing power of a 100k wage back to roughly 2010's equivalent.
3. Property
Property prices historically grow much faster than CPI.
For example:
- In 1970, a house in Sydney cost about 4.5 times the average annual income.
- By 2020, that number was roughly 12.2 times income.
That’s not just inflation.
That’s a higher rate of change.
Over long periods, residential property in Australia has often grown between 6–10% per year - sometimes more in specific cycles.
In 2022, national residential prices surged by 23% across capital cities. Sydney rose 11.4% between Jan 2023 and Jan 2024.
4. Debt
And nowhere is it more dangerous than with debt.
Imagine this:
You have a $50,000 credit card or personal loan at 18% interest.
If you make minimum repayments and the balance compounds at 18%, that debt doesn’t grow slowly.
It explodes.
At 18%, money roughly doubles every 4 years.
That means:
- $50,000 becomes $100,000
- Then $200,000
- Then $400,000
Not because you spent more.
Because the rate of change was working against you.
This is why high-interest consumer debt is financially suffocating.
The compounding effect that builds millionaires in assets… destroys balance sheets in liabilities.
Interest is simply the rate of change on borrowed money.
But Debt Isn’t Always Bad
The rate attached to the debt - and what it’s used for - is what matters.
If you borrow at 6% to invest in an asset growing at 10%, the rate of change can work in your favour.
That’s called leverage.
Used wisely, leverage accelerates wealth creation.
Used poorly, it accelerates wealth destruction.
(We’ll unpack leverage properly in another article.)
Wealth Is About Capturing the Right Rate
Most people think wealth is about:
- Spending less than you earn
- Saving harder
- Cutting coffee
Real wealth is built by:
Positioning your money where the rate of change works for you instead of against you.
If:
- Cash grows at ~0–4%
- Inflation erodes at ~2–3%
- Wages grow at ~2–3%
- Property grows at ~6–10% (but has easier access to leverage)
- Shares grow at ~7–10% long term
Then your long-term outcome depends on which side of compounding you sit on.
Compounding at 8% builds wealth.
Compounding at 3% just preserves purchasing power.
Compounding at 0% slowly destroys it.
Final Thoughts
The founder I spoke to was right.
Compounding is a miracle when working for you - but deadly against you.
Inflation isn’t something to fear.
It’s something to understand.
Because once you understand that everything in finance is just competing rates of change - you stop thinking in dollars…
And you start thinking in growth rates.
And that shift changes everything.
