Compound interest is what happens when you earn interest on your interest.
How does it work? If you have money in a savings account, that money will earn interest. If you don’t withdraw that interest, and instead leave it in the account, it will increase your account balance. When your next interest payment is calculated, it is calculated on the larger account balance and earns even more interest. And so it goes on.
Compounding works the same way for investments. If each time you earn a dividend, distribution or income payment from your investment you reinvest these funds to buy more units or shares, your reinvested earnings will generate additional earnings.
Compounding can make a significant difference to the value of your savings and investments over time. The longer your money is invested, the bigger the effect compounding can have, so to take full advantage of this strategy, think about starting early.
If you’d like advice on taking advantage of compounding to help build your investment portfolio, you can book an appointment online to organise your complimentary, no-obligation consultation with a Commonwealth Financial Planner and start planning for a better life today.