“Compounding” is a word used to describe the addition of interest to the initial sum of an investment, that is to say – it’s the interest you get on the interest you’ve received, as long as you don’t withdraw it.
Compounding is a powerful tool. Let’s look at a really simple example:
Let’s say you put £1,000 into a savings account which gives you 10% yearly interest. In the first year, You acquired £100 in interest, so you now have £1,100 invested – so next year, for that 10% return, you won’t get £100 in interest, instead you’ll get £110!
If you keep that £1,000 in your account, but don’t touch it for 10 years, and just allow the interest payments to build up, you’d end up with £2,600, all from your initial £1,000 deposit!
Of course, in the real world, no savings account will pay out 10% (many offer less than 1%!), but it is possible to get similar rates when you invest that money instead*. Check out some of Wombat’s Themes, or browse some articles on the Learning Hub to get started.
*The average return from the Stock Market has historically been 8%. Your capital is at risk. Past performance doesn’t guarantee future successes