GLOSSARY // General Investing
Compounding
$10,000 growing at 8% a year becomes $21,589 in 10 years, $46,610 in 20, and $100,627 in 30. That acceleration, returns earning returns on prior returns, is compounding, and the lopsided back half is the whole point: the last decade in that example adds more dollars than the first two combined.
The formula is simple, ending value = principal times (1 + rate) raised to the number of years, but the intuition is what pays. Time is the exponent, so starting early beats contributing more later, and small rate differences explode over long horizons: at 30 years, 8% turns $10,000 into $100,627 while 6% produces $57,435. Fees, taxes, and interruptions all attack the exponent, which is why they cost far more than they appear to.
Two savers invest $6,000 a year at 8%. One starts at 25 and stops contributing at 35, investing $60,000 total. The other starts at 35 and contributes until 65, investing $180,000. At age 65 the early starter has roughly $945,000; the late starter, despite investing three times as much, has about $735,000. Ten extra years of exponent beat twenty extra years of contributions.
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Related terms
Educational only — not financial advice. Definitions simplified for clarity; markets are messier than definitions.