How does compounding interest work?

Invest now and give your money more time to grow

What is compounding interest

There are a lot of strategies for investing, but one of the most basic is simple to start now. You can use time to your advantage by starting early and putting a concept called compounding to work for you.

How compounding interest works

Your money earns money over time, usually through interest or dividends. Then you earn money on your initial investment and the earnings. This is compounding. The more time your money has to grow through earnings, the more opportunity you have for compounding.

Here is a compounding interest example. Let’s look at two fictional investors – Sue and Bob – who earn an average 8% rate of return on their investments:

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.

The bottom line is that time is money, so make the most of it.

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