Ever wondered how a small amount of money can grow into something much bigger over time? That’s the power of compounding.
Think of it as your money working for you – not just once, but again and again. In this beginner’s guide, you’ll get compounding explained in simple terms, with examples that make it easy to understand.
If you’ve just getting started, don’t miss our guide to investing for beginners.
What is Compounding?
Compounding is the process where your money earns returns, and then those returns earn more returns.
It’s like planting a tree: over time, it grows, produces fruits (interest), and those fruits carry seeds that grow into new trees.
This snowball effect is why compounding is often called the eighth wonder of the world by investors.
How Compounding Works (Step by Step)
Here’s a simple breakdown:
Compound Interest Example for Beginners
Let’s imagine you invest ₱10,000 with a 10% annual return:
By Year 10, you don’t just double your money. You’ll have ₱25,937, thanks to compounding.
👉 Without compounding (simple interest), you’d only have ₱20,000 after 10 years.
Why the Power of Compounding in Investing Matters
Tips to Maximize Compounding
Key Takeaways
Compounding is simple but powerful. It’s not about getting rich overnight, it’s about letting time and patience do the heavy lifting.
For beginners, understanding how compounding works can be the difference between just saving and investing (truly growing wealth).
