Compounding happens when returns begin earning returns of their own. The process is slow at first, which makes it easy to underestimate during the early years.
The curve is not a promise
Illustrations use assumed returns, while real investments rise and fall. Compounding describes the math, not a guaranteed outcome.
Consistency creates more opportunities
Regular contributions add new principal and reduce the pressure to find a perfect entry date.
High-interest debt compounds too
The same mechanism works against a borrower when unpaid interest remains on a balance. Paying expensive debt can be a powerful use of cash.
Sources
- U.S. Securities and Exchange Commission, Compound Interest Calculator and Investor Education.