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IntermediateLesson 14

Compounding: how money snowballs

Compounding: how money snowballs

Growth on top of past growth is what makes long-term investing powerful.

In short

Compounding means you earn growth on your past growth, not just on what you put in. Given enough time, that turns a small, steady return into a big number.

Say you grow 8% in a year. Next year you grow 8% again — but now on a bigger pile, because last year’s gain is in there too. Each year builds on the last.

Because of this snowball, the longer you stay invested, the more of your final wealth comes from growth on growth rather than from your own deposits.[1]

simplecompoundtime →
Simple growth adds the same bit each year. Compound growth curves upward.
Compounding — try it
$122,731
after 20 years
You added $49,000Growth $73,731

Watch how much of the final pot is growth on growth (green) versus the money you actually put in.

It’s a snowball rolling downhill. It starts tiny, but each turn adds a bigger layer — because the ball is already bigger.

~9 years

A handy shortcut, the “Rule of 72”: divide 72 by your yearly return to see how long money takes to double. At 8% a year, that’s about nine years.[2]

The flip side: time is the main ingredient. Starting earlier matters more than picking the perfect investment, because the snowball needs room to roll.

Where these numbers come from

Finisdom’s backtester and growth charts use real price history, so the compounding you see is what actually happened — not a smooth made-up curve.

See compounding in the Portfolio LabPart of the Finisdom app — sign in to open it.

Check your understanding

What makes compound growth curve upward over time?

Sources & further reading

  1. 1.Bodie, Kane & Marcus (2014) Investments (10th ed.) — McGraw-Hill — A standard university finance text on how returns compound over time.
  2. 2.U.S. SEC Compound Interest Calculator — Investor.gov — A free official tool that shows the snowball for any numbers you type in.

Related

Risk and rewardWhat “risk” really measures

Tripped up by a word? Look it up in the glossary.

Learning only — not investment advice.