Whether you're investing for retirement, higher education, or a new home, knowing how quickly your investments may grow will help your decision-making process. Reinvesting, or compounding, your earnings can make a big difference in your investment account's growth.
Compounding occurs when you reinvest your earnings and/or dividends in the fund. You may not see the benefits of compounding right away but account growth can gain momentum as earnings begin to accumulate.
Using the Rule of 72, the chart below shows you how compounding might play out over a 20-year period with a $1,000 investment. We used a 6% estimated rate of return.
The illustration above is intended to show the principle of compounding. This hypothetical chart is for illustrative purposes only and doesn't represent any specific type of investment. It doesn't include the impact of expenses or fees, which would have reduced the results of the illustration.
As you can see, compounding made a small difference in the ending balances during the early years. However, as more earnings were added, compounding made a significant difference over time. Remember, this is a simplified example.
Time can be on your side. Saving for retirement early might make a dramatic difference in reaching your financial goals. In the example below you can see the difference an early start makes. Remember, this is a simplified example.
This hypothetical example of compounding is for illustrative purposes only and does not represent any specific type of investment. It does not include the impact of expenses or fees, which would have reduced the results of the illustration.
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