Written by Pat Brown, MBA
Compounding is often called the eighth wonder of the world—and for good reason. It’s a powerful tool that allows your money to grow exponentially over time. Understanding how it works can set you on the path to financial success.
What Is Compounding?
Compounding is when the interest or returns you earn on your money start earning their own returns. Over time, this snowball effect accelerates, turning small amounts of money into significant wealth.
How Compounding Works
Initial Growth
Your principal investment earns interest or returns.Reinvesting Returns
Instead of withdrawing the earnings, you reinvest them, allowing your money to grow faster.Time Multiplies Results
The longer your money stays invested, the greater the impact of compounding.
The Key to Compounding Success
Start Early
The earlier you invest, the more time compounding has to work its magic.Stay Consistent
Regular contributions, even small ones, make a big difference over time.Be Patient
Compounding rewards patience. Resist the urge to cash out too soon.
An Example of Compounding
Imagine investing $1,000 annually at a 7% return starting at age 25. By age 65, you’ll have over $215,000. Wait until age 35 to start, and you’ll only have around $102,000.
Harness the power of compounding by starting today. Whether it’s saving, investing, or reinvesting your earnings, small actions now can lead to a lifetime of financial security.
Pat Brown, MBA
Dedicated to empowering financial growth and literacy.