How Compounding Works and Why You Should Know About It

We should all know about Compounding (interest) as it relates to investing.  Investopedia.com defines the word “compounding” as:  

The ability of an asset to generate earnings, which are then reinvested in order to generate their own earnings.

In other words, compounding refers to generating earnings from previous earnings.  Also known as, "compound interest".

There is another type of interest.  It is one I do not like so much: simple interest.  Booooo!  Check out this great visual that shows side by side the difference between the two types:

Initial Investment = $5,000 and the Interest Rate is 10% in both cases.  Sourcehttp://stdavid.wcdsb.ca/Academics/Departments/Business/Online%20Courses/bta3oi/Financial%20Applications.htm:

   

Investing with Rich-Uncles gives you the compounding interest edge!  You can reinvest your dividend payment and turn into earnings that will generate their own earnings.  Genius!  No wonder Albert Einstein said: “Compound interest is the eighth wonder of the world.  He who understands it, earns it ... he who doesn't ... pays it.”