How compounding can help you build wealth When it
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Posted On: 01/14/2024 8:11:14 AM
How compounding can help you build wealth
When it comes to investing, the sooner you start, the better. That’s because of compound interest, which can help your money grow.
Here’s how it works: After you make an initial investment, you theoretically earn a return on that principal amount. As interest is added to your balance, you begin to earn interest on that amount as well.
Say you invest $1,000 and earn an annualized return of 4%. A year later, your investment would have grown to $1,040 which is your original $1,000 investment plus four percent.
In year two, you’d earn 4% on the entire total, not just the principal balance of $1,000. By the end of the year, you’d have $1,081.60. In year three, you’d then earn 4% on $1,081.60, and so on.
When it comes to investing, the sooner you start, the better. That’s because of compound interest, which can help your money grow.
Here’s how it works: After you make an initial investment, you theoretically earn a return on that principal amount. As interest is added to your balance, you begin to earn interest on that amount as well.
Say you invest $1,000 and earn an annualized return of 4%. A year later, your investment would have grown to $1,040 which is your original $1,000 investment plus four percent.
In year two, you’d earn 4% on the entire total, not just the principal balance of $1,000. By the end of the year, you’d have $1,081.60. In year three, you’d then earn 4% on $1,081.60, and so on.
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