When Compounding Turns Against Us

Previously, I wrote about how compounding is the 8th wonder of the world.  When used wisely, it is the magic that helps me grow wealth quietly in the background, as long as I give it sufficient time, inject a big enough capital, and manage a sufficiently decent yield.  However what people often ignore, forget or dismiss, is how compounding does not discriminate.  It is just a force, and it can just as easily work against one, as it can work in one's favor.

In my own journey, I have seen both sides of compounding.

On the positive side, compounding has helped my dividend portfolio grow.  Every reinvested payout plants a seed that continues to bear fruit.  But on the negative side, I have also experienced how a property with negative cashflow quietly chips away at my finances.  Month after month, it drains resources that could have been building my future.  People often say mortgage debt is “good debt”, but I have come to realize that if it does not pay for itself, even “good debt” can become a burden that compounds against me.

This does not restrict to just property.  Many people face the same compounding trap in other ways.

1)     Credit Card Debt

That “just swipe first, pay later” mentality feels harmless for small amounts.  However when interest rates are 24% or more, compounding becomes your enemy.  A SGD 1K balance left unpaid can quietly grow into SGD 1.24K the next year, then SGD 1.54K the year after.  It does not take long before the debt snowballs beyond control.

2)     Personal Loans

This is meant to provide short-term relief, but with interest and fees, they can stretch into long-term shackles.  The repayments eat into your income, reducing what you can save or invest.  Once again, it is the compounding of lost opportunities.

3)     Over-Leverage On Investments

Sometimes in the pursuit of wealth, one may borrow more than one should.  However if the investments do not perform, the compounding works against one from both sides: debt obligations keep rising, while missed growth opportunities slip further away.

It is painful to admit, but these situations all have the same root.  Negative compounding is a silent worker in the background, eroding one's financial health with time.  If this is left unchecked, it does not just damage the numbers in your bank account, it also eats away your confidence, your peace of mind, and your ability to take advantage of future opportunities.

Breaking the Cycle

The first step is honesty.  For myself, I had to be brutally honest with myself about my property - the numbers just were not working, and pretending otherwise was only prolonging the damage.  Similarly, anyone facing credit card or personal loan debts needs to stop brushing it aside.  Compounding does not wait for one to feel ready.  So, here are some ways to flip the situation:

1)     Stop The Bleeding

Always pay down the highest-interest debt first (usually credit cards).  For property, reassess if it is worth holding, or whether selling is the smarter move.  Sometimes cutting losses is a form of self-rescue.

2)     Restructure If Possible

Refinance debts into lower-interest options is one way to dig one out of financial misery.  Even shifting from credit card to a personal loan at a lower rate can slow the negative compounding.  For mortgages, one can choose to refinance or reprice to extend tenure or lock in a lower interest rate if the math works out.

3)     Rebuild Positive Compounding

Redirect freed-up cash into income-generating assets, like dividend paying shares or stable blue-chip growth stocks.  Even small amounts compound positively over time.

4)     Guard Against Repeat Cycles

When cashflow starts turning positive, immediately star building buffers in the form of emergency funds, insurance coverage, and exercise prudent spending habits.  Always remind yourself that compounding works best with consistency.  Once freed, avoid going back into debt traps that disrupt the cycle.

Closing Reflections

Compounding is a double-edged sword.  It does not take sides.  When aligned with savings and investments, it is the gentle force that grows our future.  But when tied to debt, it becomes a quiet destroyer, robbing us month after month.

I have learned that ignoring negative compounding is like allowing a slow leak in your boat.  At first, it seems manageable, but over time, the boat sinks, not because of one big wave, but because of the steady drip you never fixed.

That is why I believe the real financial journey is about awareness and course correction.  It is important to recognize when compounding is working against you, to plug the leaks, and to redirect that powerful force back onto your side, because once you have broken free from negative compounding, that is when you can finally enjoy the fruits of positive compounding - the very wonder that can carry you towards financial independence and peace of mind.  Barista FIRE, here I come...!