The concept of compounding in investments sounds too good to be true. And yet it is. Compounding is when you continue to earn additional interest on your original investment plus any interest that has already accrued. You are earning returns on your returns. With compounding your earnings can grow exponentially.

The chart below shows two growth trajectories of an initial $1000 investment in a standard index fund over 10 years. It assumes an average 10% return annually, taking into account market downturns. The light green scenario does not include any additional deposits from you and grows to $2,500 after 10 years from returns alone. This shows that even without any additional contributions your initial $1000 continues to grow. The dark green scenario includes an additional $100 deposit from you every year and amounts to $3,900 after 10 years, including your deposits and returns. When you do make more contributions, the growth is larger.

The chart shows that compounding rewards time and discipline. The longer your money is invested the more time it has to grow. And the discipline comes in with the ability to leave that money untouched and possibly making more deposits into your investment account on a consistent basis. 

Disclaimer: This newsletter is for informational and educational purposes only and should not be considered financial, investment, tax, or legal advice. I am not a licensed financial advisor. Please consult a qualified professional before making any financial decisions.