$100 invested with an annual return of 8% (a conservative estimate of stock market returns) will be worth $108 in one year. At the end of year two it will be worth $116.64. That’s because you get 8% on the full $108 value at the end of year one, rather than just another $8 every year. That’s the magic of compounding.
While it might not seem like it makes a big deal in the example above, that’s simply because we’re not looking at a long enough period of time. What happens at the end of ten years? That same $100 is now worth $215.89.
At the end of 20 years it’s worth $431.57. Click here to explore this concept in more detail.