There’s an old saying that those who understand compound interest earn it, while those who don’t end up paying it. I think there’s a lot of truth to that, particularly when it comes to personal finance.
If you’re constantly borrowing money through credit cards, personal loans, or other forms of debt, interest works against you. The longer you carry a balance, the more money you potentially owe, especially when unpaid interest is added to the principal.
Investing allows you to put the same principle to work in your favour. Instead of paying interest to someone else, you’re earning returns on your capital and, over time, generating additional returns on those accumulated gains.
That’s the basic idea behind compounding, and it’s one of the most important concepts to understand if you want to build enough wealth to retire comfortably in Canada.
The good news is that you don’t need a large sum of money to begin. Even $1,000 can be a perfectly reasonable starting point, provided you’re willing to invest consistently and give your portfolio enough time to grow.
Start with a diversified ETF
For Canadians who are just getting started, I think one of the easiest ways to invest $1,000 is through a broadly diversified exchange-traded fund (ETF). A personal favourite is the iShares Core Equity ETF Portfolio (TSX: XEQT), which charges a 0.19% expense ratio.
XEQT is an all-in-one asset allocation ETF that invests in thousands of stocks across Canada, the United States, developed international markets, and emerging markets. What I like about XEQT is that it provides a convenient approximation of the global equity market through a single investment. You don’t need to research individual stocks, decide which countries will outperform, or manually rebalance.
There is one important caveat. XEQT allocates considerably more to Canadian equities than Canada’s share of global stock market capitalization would otherwise justify. That home-country bias means it isn’t a perfect representation of the global market. Still, I think it’s a reasonable compromise for Canadian investors who want a diversified, low-maintenance portfolio.
XEQT also holds 100% stocks, so it can experience substantial volatility. I’d only consider it for growth capital I wouldn’t need for at least several years, preferably two decades or longer.
How much could $1,000 have grown?
To illustrate the power of compounding, I used Portfolio Visualizer to examine XEQT’s historical performance from January 2020 through September 2026. The first scenario was straightforward: invest $1,000 at the beginning of the period, reinvest all distributions.
By the end of September 2026, that initial $1,000 would have grown to approximately $2,407, representing a 13.9% compound annual growth rate (CAGR). In other words, the investment would have more than doubled in less than seven years. Of course, that result reflects a particular historical period. It includes strong equity market performance and shouldn’t be treated as a guaranteed future return.
But I think the more interesting example is what happens when you combine compounding with regular contributions. Suppose you started with the same $1,000 but also invested another $100 every month. Under that scenario, Portfolio Visualizer shows an ending balance of approximately $16,662 by September 2026.
Focus on contributions, not finding the perfect investment
When people first start investing, it’s tempting to spend an enormous amount of time searching for the perfect stock or ETF. But I think that’s often the wrong priority. XEQT is already good enough for many long-term investors. It’s diversified, relatively inexpensive, and automatically rebalances its underlying holdings. You don’t need to predict the next winning sector or constantly trade to make progress.
What matters more is developing the habits that allow compounding to work. Contribute regularly, ideally by automating transfers every payday. Reinvest distributions rather than withdrawing them. Avoid panic selling during market downturns, and resist the temptation to chase whatever investment has recently performed best.
I’d also make full use of available registered account contribution room. Inside a Tax-Free Savings Account (TFSA), investment gains and distributions are generally tax-free, and qualifying withdrawals are also tax-free. A Registered Retirement Savings Plan (RRSP) can provide an upfront tax deduction, with investments growing tax-deferred until withdrawal.
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