What is compounding and how does it work?

What is Compounding? Compounding is the process of the exponential increase in the value of an investment due to earning interest on both principal and accumulated interest. How Does Compounding Work? Let's assume you have $100 to open a savings account at XYZ Bank on January 1.

What does compound mean?

a pure substance composed of two or more elements whose composition is constant. to put together into a whole; to compound drugs to form a new medicine. to make or form by combining parts, elements, etc.; to compound a new plan from parts of several former plans. to make up or constitute: all the organs and members that compound a human body.

What does compounen mean?

Middle English compounen "combine, compound," from early French compondre (same meaning), from Latin componere "compound, combine," from com- "with, together" and ponere "to place, put" — related to position

Why is compounding a'magic'?

Compounding is often referred to as 'magic' because it is one of the most fundamental ways to build wealth, yet takes the least amount of effort. Given time, earning interest on interest can exponentially grow wealth.