What is Compounding?
Compounding is the fact that the money you make off an investment can be reinvested to make even more money than your initial investment. The money you make goes back to work to make you even more money than before. Sound confusing? It’s actually pretty simple. Say you’ve invested $10,000 and it makes 10% interest per year. In the first year, you’ll make $1,000 in interest. But in the second year, you’ll make $1,100 (not only does your initial investment of $10,000 accrue interest but so does the additional $1,000 you made in the first year). In the tenth year, you’ll make $2,358. And in the 30th year you’ll make $15,864. That’s all without making another investment beyond your initial $10,000. In 30 years, the power of compounding gets you from making $1,000/year to making $15,864 per year. Pretty remarkable, huh? You can magnify the results of compounding even further by doing regular investments. When it comes to building wealth the most effective way of amassing resources is to m
In finance and investing, compounding is the act of reinvesting your profits so that they can make additional profit. Compounding is often discussed in the context of compound interest on savings accounts or mutual funds. Understanding whether your investment pays simple or compound interest can make a huge difference in the amount of money your investments or savings earn. Financial institutions may compound interest, daily, monthly or yearly. In the simplest terms, imagine that you drop $1000 US Dollars (USD) in a savings account that earns 5% interest compounded yearly. The first year, you would earn $50 USD on your initial investment. As long as you kept that money in place, the next year, you’d earn five percent of $1050 USD, $52.50 USD. In two years, since your investment was compounding, your investment would now be worth $1102.50. When your investment is not compounding, you are earning what is called simple interest, only the interest on the initial investment. Instead of your
