a beginner's guide to investing: compounding

InvestingC O M P O U N D I N G

A B E G I N N E R ' S G U I D E T O

"Compound Interest"

Compounding, also known ascompound interest, is the process of

taking what you earn from aninvestment and reinvesting thatmoney back into the investment,earning you exponentially more

money as time passes.

ForExample...

For example, if you invest $5,000 andhave an interest rate of 4% each year,you will end up with $5,200 ($5,000 x1.04) at end of year one.

Instead of taking that $200 at the endof the year and using it for somethingelse, you would reinvest that $200 withthe addition of your original investment,or principal, being $5,000.

Reinvest $200

So, by end of year two, you would end upwith $5,408 ($5,200 x 1.04). See how this cangrow exponentially? Compounding interest is

a gold mine for those who invest in it.

Results

As you can see, the interest youearned the first year was $200. Theinterest you earned the second yearwas $208. You didn’t have to doanything additional to earn thatextra $8.00.

By the end of the next year, youwould result in $5,624.32, leavingyou with an earning of $216.32. That$16.32 more than the interest youearned in year one and $8.32 morethan you earned in year two.

AnotherExample

The principal is the initial amount ofmoney you choose to invest. Let’s sayyou choose to invest $10,000 now andyou plan to reap the rewards 50 yearsfrom now. Each month, let’s say youchoose to add $200 to the principalas you earn more money, and yourannual compound interest rate is 5%.Your investment would be worth$617,109.19 at the end of 50 years!

Visit https://www.investor.gov/additional-resources/free-financial-planning-tools/compound-interest-calculator for a compoundinterest calculator.

N O W L E T ’ S S A Y Y O U I N V E S T E D T H E S A M EA M O U N T O F M O N E Y W I T H T H E S A M E ,

A N N U A L C O M P O U N D I N T E R E S T R A T E B U TO N L Y I N V E S T E D I T F O R F O R T Y Y E A R S .

Y O U W O U L D O N L Y H A V E $ 3 6 0 , 3 1 9 . 3 5 B YT H E E N D O F T H E T E R M ! T H A T I S

$ 2 5 6 , 7 8 9 . 8 4 L E S S !

As you can see, the concept ofcompounding makes a massive differencein the amount of money you earn on aninvestment. In taking the first steps towardsinvesting, it is important to not only noticethe compound interest rate, but also todecide on a lengthy amount of time toallow your principal and interest tocompound.

I N T E R E S T E D I N L E A R N I N G M O R E A B O U TI N V E S T I N G ? C O M E B A C K I N A F E W W E E K ST O S E E M O R E O F “ A B E G I N N E R ’ S G U I D E

T O I N V E S T I N G . ” I N T H E M E A N T I M E ,F O L L O W M E O N T W I T T E R F O R W E A L T HM A N A G E M E N T U P D A T E S , N E W S , A N D

T R E N D S @ E R I C A H I L L _ K W !

Thank YouF O R L I S T E N I N G

E R I C A H I L L . N E T