Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate.
As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding.
For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you'd have $21,589 in your account after 10 years.
If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.
- Browse Related Terms: Capital gains distribution, Compounding, Direct investment, Direct purchase plan (DPP), Distribution, dividend, Dividend reinvestment plan (DRIP), dollar cost averaging, Fractional share, Growth, January Effect, reinvestment, total return, Total return index
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