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What is Compounding?

Compounding is a financial marvel, a way to grow your money over time with the payment of interest. The idea is simple enough and the magic it creates with your investment dollars can make you very wealthy - okay, maybe not very wealthy but much better off had you not done a thing.

The process is easy to grasp. If you begin with a thousand dollars ($500) and put in an account that pays 5% interest, after the first year, you would have a $525.01. But in the second year, that $525.01 is used as the balance when you calculate how much your money has grown.

$525.01 x 0.05 = $551.26

Here is a quick look at how you would do, year over year starting with a depsoit value of $ 500.00 paying five percent.
Over the course of 20 years, you will have an ending value of $ 1327.00 giving you a total Yield 265.40 %

Here is the full table showing the effects of compounding over a twenty year period.