Compounding interest is a powerful investment tool. By reinvesting your dividend and interest payments, you can significantly boost your investment returns over the long term.
Compounding refers to interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the initial principal deposit. As a result, compounding accelerates returns as you are earning not only interest on your principal, but interest on your interest.
Anyone can benefit from compounding interest. The longer your money compounds, the faster it grows. For example, if your investments earn 6% per year and your interest and dividends are reinvested, you will double your money in 12 years. You can accelerate your earning power even more by contributing principal payments to your accounts periodically. Even small deposits will realize significant benefits with compounding over the course of time.