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.
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.