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Compound growth is a powerful investing concept that can help you reach your financial goals. Simply put, it helps you earn more money more quickly — from money you’ve already invested.
Compound growth refers to interest earning interest. This concept can also be applied to investment earnings and growth. For example, you invest $1,000 and earn a 6% interest rate, which is your “rate of return.” In the first year, you would make $60, bringing your total investment to $1,060.
Next year, you would earn interest on your total $1,060 investment. If your return were once again 6%, you’d make $63.60 the next year, bringing your total investment to $1,123.60.
Over the long term, compound growth multiplies 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.
Another way to reap the benefits of compounding is to reinvest 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. In most cases, you'll still owe taxes on those dividends each year.
Want to build your money faster? Add small amounts of 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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The example provided is hypothetical and is provided for informational purposes only. It is not intended to represent any specific return, yield, or investment, nor is it indicative of future results.
Dividends are not guaranteed and are subject to change or elimination.
This information is provided for educational and illustrative purposes only.
Wells Fargo Wealth Management provides products and services through Wells Fargo Bank, N.A., and its various affiliates and subsidiaries.
Wells Fargo & Company and its affiliates do not provide tax or legal advice. Please consult with your tax and legal advisors to determine how this information may impact your own situation.
Past performance does not indicate future results. The value or income associated with a security or an investment may fluctuate. There is always the potential for loss as well as gain.
Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company.