Why Compound Interest is Important
Why Is Compounding Interest Important
Many of us have heard that the sooner you start investing your money the better. The reason for this is compounding. When you put your money into a retirement account, you make decisions on where to invest that money so you can earn a return.
The returns you earn on the money you put in to your account don’t just sit there. They earn a return as well.
Let’s use an example of a snowball. When you build a snowball, you first gather up some snow and create your ball – we’ll call that your initial investment. But if you roll that ball down a snow covered hill, it will pick up more snow and grow larger over time.
Using the same snowball analogy, when it reaches the bottom of the hill, that’s like keeping your money invested for a short period of time. Your snowball will be bigger than when you started, but probably not big enough to build a snowman. So you repeat the process until you have the size of snowball you want.
Likewise, the savvy investor who is looking to invest for the long term, will keep their money invested and can end up with a considerable sum over time. That’s why getting started early makes sense.
By investing even a little at the beginning of your career, it can have time to grow – and build upon itself. Over time, your initial investment when you are younger can become a considerable sum by the time you need to use it in retirement.