What is compounding in the context of saving and investing?
1. The process of only earning interest on your original deposit
2. The process of earning interest on both your initial investment and the interest it has already generated
3. A way to reduce risk by diversifying investments
4. A method banks use to calculate loan repayments
Compounding means that your savings grow not just from the money you put in, but also from the interest earned on previous interest. Over time, this “interest on interest” effect makes savings grow at an accelerating rate, which is why starting early is so powerful for retirement investing.
Answer:
2. The process of earning interest on both your initial investment and the interest it has already generated
Compounding means that your savings grow not just from the money you put in, but also from the interest earned on previous interest. Over time, this “interest on interest” effect makes savings grow at an accelerating rate, which is why starting early is so powerful for retirement investing.
