The power of compounding
Find out more about investment basics:
The Power of Compounding
Inflation reduces the purchasing power of your money and can affect savings goals. Compounding takes full advantage of the relationship between time and the earnings on savings.
When you reinvest earnings (the interest, dividends and capital gains on your investment), these earnings should appreciate in value along with the original amount invested – therefore your total savings should grow faster over time.
Investments allowed to compound over time can increase in value very quickly. Automatic reinvestment of stock dividends, bond interest or mutual fund earnings is a great way to quickly build a sizeable nest egg for your future retirement.
The chart below shows you how much a retirement account could be worth at various points in the future. The example assumes a person has a salary of 30,000 p.a. and saves either 5% or 6% of salary making regular monthly contributions in each month over the period, and shows the compounded results where the annualised investment rate of return has been 6%. Notice the difference saving just 1% extra makes to the retirement pot!
The information contained in this chart is for illustration purposes only and in no way guarantees the indicated rates of return.