Power of Compounding: Let Your Money Work for You

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Whether you’re putting money away in a retirement or savings account, the sooner you start saving, the better – thanks to the power of compounding, a concept that can help you build wealth over time.

Compound interest, for instance, puts your money to work by earning interest on interest in a savings account. With investment accounts (like your retirement plan), your money could grow over time via the compounding of your potential earnings.

Let’s take a closer look.

Compound interest could help grow your savings account balance

Compound interest is interest you earn on top of the interest you’ve accrued from your original deposit. In other words, you’re earning interest based off of your principal balance plus any interest that has been added to your principal over time.

Here’s a basic example to demonstrate this concept of “earning interest on interest.”

Let’s say you open a savings account with an initial deposit of $10,000, and you plan to leave the money untouched. Assume for illustrative purposes that the account pays you 2.15% APY each year, and the interest compounds annually.

  • In the first year, you would earn $215 in interest ($10,000 x 2.15%), leaving you with a year-end balance of $10,215.
  • In the second year, your interest earning will be calculated based on your new balance of $10,215 instead of $10,000 (your initial deposit). In other words, you’re earning interest on top of the interest you earned in the first year, which has been added to your principal.
  • Again, assuming you leave your money untouched: The same 2.15% rate on $10,215 would give you nearly $220 in interest earnings at the end of your second year ($10,215 x 2.15%), bringing your year-end balance to about $10,435 ($10,215 + $220).

You can read more in our compound interest article.

Good to know: Compounding can occur at different frequencies – daily, monthly, or annually – as determined by your bank. The important thing to remember is that the more often it compounds, the faster your money could grow. 

Power of compounding in terms of investing

Investment accounts, like your retirement plan, can receive earnings or dividends, and those returns can compound over time. An example is when your earnings are reinvested to help generate additional potential account growth.

That’s why generally speaking, the longer you’re able to stay invested, the more money you could potentially earn in the long term.

An important reminder: Investment returns are not guaranteed; they depend on the performance of the assets in your portfolio. When it comes to investing, you could earn money or lose money (including your principal) based on market conditions.

Compounding in action: To help you visualize the power of compounding, let’s say you open a retirement account with an initial contribution of $6,000. If the account were to deliver a hypothetical return of 5% each year, your initial $6,000 would become…

  • $9,773.37 in 10 years
  • $15,919.79 in 20 years
  • $42,239.93 in 40 years

Note: This example is for illustrative purposes only.

Our basic example is based off an initial $6,000 contribution with a 5% return. But ideally, you’d keep contributing to your retirement account year after year and let that money compound over the long term. 

Reaching your goal starts with saving for it.

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Bottom line

Whether you’re saving or investing, the sooner you start, the more time you’ll have to let the power of compounding do its work. 

This article is for informational purposes only and shall not constitute an offer, solicitation, or recommendation. This article was prepared by and approved by Marcus by Goldman Sachs® but is not a description of any of the products or services offered by and does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA is not providing any financial, economic, legal, accounting, tax or other recommendation in this article and it is not a substitute for individualized professional advice. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice.  Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, or any of its affiliates, none of which are a fiduciary with respect to any person or plan by reason of providing the material or content herein. Neither Goldman Sachs Bank USA, nor any of its affiliates make any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.