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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.
|Year 1- $1,060||Year 11- $2,011||Year 21- $3,603|
|Year 2- $1,124||Year 12- $2,132||Year 22- $3,819|
|Year 3- $1,191||Year 13- $2,260||Year 23- $4,048|
|Year 4- $1,262||Year 14- $2,396||Year 24- $4,291|
|Year 5- $1,418||Year 15- $2,540||Year 25- $4,548|
|Year 6- $1,503||Year 16- $2,692||Year 26- $4,821|
|Year 7- $1,593||Year 17- $2,854||Year 27- $5,110|
|Year 8- $1,689||Year 18- $3,025||Year 28- $5,417|
|Year 9- $1,790||Year 19- $3,207||Year 29- $5,742|
|Year 10- $1,897||Year 20- $3,399||Year 30- $6,087|
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.
|Started Investing At:||age 25||age 45|
|Number of Years||10 years||20 years|
|Rate of Return||6%||6%|
|Value of investment at age 65||$425,304||$206,661|
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.
Neither State Farm® nor its agents provide tax or legal advice.
Securities distributed by State Farm® VP Management Corp.
Securities are not FDIC insured, are not bank guaranteed and are subject to investment risk, including possible loss of principal.