The Power of Compounding: Single Investment

See what can happen when you develop a savings habit

The power of compounding should be a compelling motivator when it comes to saving for your future. To start, when you invest a certain dollar amount that then earns a certain rate of return over the year, at the end of the year, your investment will have grown:

What You Invested
x
Rate of Return
=
Future Value
$100,000
x
5%
=
$105,000

This is good…but what happens next is where the magic lives! The following year, your interest rate will be applied to the larger balance (in this case $105,000) and even if it grows at a similar rate, you will earn more dollars than the prior year because you started with a higher balance.

Starting Balance
x
Rate of Return
=
Future Value
$105,000
x
5%
=
$110,250

This example shows that without contributing more, the rate of return earned you $250. Of course, $250 many not seem like much but over the course of many years, imagine the additional wealth compounding could bring – without you having to do anything more!

Now, if you are patient and disciplined in your savings and continue to contribute each year to your account (we highly recommend automatic contributions!), compounding can even have a greater effect.  While you may not see gains every year, try not to get discouraged. Keep an eye on your goal and you could have what you need to be able to create the future you want.

Check out our calculator below to see how the power of compounding can work for you when you save every year.

To see what compounding can do for you on a one-time investment, check out our other compounding calculator.

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Note: The calculation assumes compounding on an annual basis. Rates of return tend to fluctuate so you can expect to experience varying percentages every year you are invested. As return rates change, the future value of your investment will change; and, of course, changes to the amount contributed will affect the future value as well.

The Compounding Calculator is a tool for you to use in your financial planning. The results are based on the information provided by you, and Guided Choice is not responsible for any errors or omissions with respect to such information. The calculations provided should not be construed as financial, legal or tax advice. In performing these calculations, the Compounding Calculator makes certain assumptions that may change over time. Results and recommendations provide by the Compounding Calculator are not guaranteed.