Compounding: Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment base gets larger, it has the potential to grow faster. And the longer your money is invested, the more you stand to gain from compounding. For example, if you invested $10,000 earning 8% annually and reinvested all your earnings, you’d have $21,589 in your account after 10 years. If instead of reinvesting you withdrew the earnings each year, you would have collected $800 a year, or $8,000 over the 10 years. The $3,589 difference is the benefit of 10 years of compound growth.

 

Related Words

Compounding: Compounding occurs when your investment earnings or savings account interest is added to your principal, forming a larger base on which future earnings may accumulate. As your investment bas . . . View Full Definition

Compounding Period: The number of compounding periods in a year. For example, quarterly compounding has a compounding frequency of 4.

Compounding Frequency: The process of accumulating the time value of money forward in time. For example, interest earned in one period earns additional interest during each subsequent time period.

Continuous Compounding: Under ERISA, a firm is liable to its pension plan participants for up to 39% of the net worth of the firm.