Compounding is a powerful investing concept that involves earning returns on both your original investment and on returns you received previously. For compounding to work, you need to reinvest your returns back into your account. For example, you invest $1,000 and earn a 6% rate of return. In the first year, you would make $60, bringing your total investment to $1,060, if you reinvest your return.

Next year, you would earn a return on your total $1,060 investment. If your return were once again 6%, you’d make $63.60, bringing your total investment to $1,123.60.

Over the long term, compound growth can multiply your initial investment exponentially. In our hypothetical example, if your return stayed at 6%, by year 30, your annual earnings would be $325.10. That’s more than five times the $60 return you earned the first year — just for sitting by and letting your money grow.

Make compound growth work for you

Take the effort out of compounding by reinvesting your earnings automatically. In turn, those earnings add to the value of your account and boost the potential to earn even more. The key? Patience. Don't be tempted to withdraw the funds when they grow. Keep in mind that if you hold your investments in a taxable account, you'll still be taxed on the interest, dividends, and capital gains you receive, even if you reinvest them into the account.

Want to help build your money faster? Add new money to the account regularly. Your financial services provider can help you establish such an automatic transfer easily, or your employer might offer the option to do so with a split direct deposit.

Compounding relies on the power of time. Start saving and investing early — either in an account that earns interest or with an investment that pays dividends that can be reinvested.

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