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Investing

What is compounding?

The meaning

Earning money on money you’ve already earned. Once your investments start generating returns, those returns also start generating returns. Over time, the whole thing grows faster and faster. The longer you let it run, the more powerful the effect. This is exactly why starting early matters so much.

Example
Today$10,000
10 years~$19,700
20 years~$38,700
30 years~$76,100
$10,000 growing 7% a year. The longer it runs, the faster it grows.
Walk through the numbers

$10,000 growing 7% a year becomes about $19,700 after 10 years, $38,700 after 20 and $76,100 after 30. The last ten years add more than the first twenty combined.

Why it matters

Time does most of the work. Starting a few years earlier can matter more than investing a little more each month later.

Read: Why Starting to Invest Early Matters →

Related terms

Dividend reinvestmentUsing your dividends to buy more shares, so your income grows on its own.Dollar-cost averagingInvesting the same amount on a schedule, no matter what prices are doing.YieldThe income an investment pays each year, as a percent of what it costs.InflationThe slow rise in prices that makes each dollar buy a little less.

See all 34 terms · Read the full glossary

For education only and not personalized investment advice. Examples are hypothetical illustrations, not a prediction or a promise of results. All investing involves risk, including the possible loss of principal.