Compounding

Invest now and give your money more time to grow.

There are a lot of strategies for investing, but one of the most basic is simply to just start now. Although it’s never too soon or too late to begin, you can use time to your advantage by starting early and putting a concept called compounding to work for you.

Compounding – What is it?

Compounding is simply your money earning money over time, usually through interest or dividends. That money in turn earns more money. The more time your money has to earn, the more opportunity for compounding.

Here's an example

Sue and Bob are two fictional investors who earn an average 8 percent rate of return on their investments:

Sue started saving and investing for retirement at age 30 and saved $2,000 a year for just 10 years. At the 8% rate of return, she ended up with $198,422 at age 65. 

Bob waited until he was 40 to start, but saved $2,000 a year for 25 years. But, by delaying, he ended up with $157,909 at age 65 — over $40,000 less.

The difference? Because Sue’s money had more time to compound, she ended up with a lot more at retirement even though she put in $30,000 less than Bob.

Keep in mind

This example is only an illustration and isn’t intended to reflect the return of any actual investment. Investments don’t typically grow at an even rate of return and may even lose money. The effect of taxes and the costs of investing have not been reflected.

The bottom line: time is money, so make the most of it!