Compounding
Earning returns on previous returns. Over long periods, compounding is why starting early can matter more than starting big.
In plain English
Compounding happens when the returns you earn start earning returns of their own. Over time, growth builds on growth, like a snowball rolling downhill.
It works for savings, investments and, unfortunately, debts too, such as unpaid credit-card balances.
An everyday example
£1,000 growing at 5% a year becomes £1,050 after one year, then £1,102.50 after two, because the second year’s growth is on £1,050. After 30 years it would be about £4,300, purely from growth on growth. (Real returns vary and are not guaranteed.)
Why it matters for investors
Time is the most powerful ingredient in compounding. That is why small, regular amounts started young can end up larger than bigger amounts started later.
Ask Knightsman for a fresh explanation, or a follow-up question of your own.
Related terms
Education only, not financial advice. Examples are simplified and use illustrative numbers.