The power of compounding
Time is your ally when it comes to investing.
Compounding means earning investment returns on previous investment returns. The longer your investment horizon, the more time your investment has to reap the advantages of compounding.
For example, say you put a hypothetical $10,000 in a mutual fund that earns 8% each year. By the end of the first year, the account would be worth $10,800. If the $800 in earnings were reinvested, the account would be worth $11,664 by the end of the second year. The extra $64 earned on the $800 return from the first year shows how earnings compound.
Over time, that reinvested money increases the size of your principal and earns even more. In fact, the value of compounded investment earnings can eventually become far greater than your contributions over the long term. This growth allows even small investments to increase in value over time and helps to offset the impact of inflation, which can erode real returns on investments.
Values are for illustrative purposes only. They do not reflect the results of any particular investment, which will fluctuate with market conditions. Your actual results may differ.