Compounding

Compounding is your money making money, and then that new money making more. It starts slow and gets powerful over long periods, which is why starting early matters more than starting big.

How it builds

In the first year, you earn a return on what you put in. In the second year, you earn on your original amount plus the first year’s return, so you are earning on a slightly larger base. Repeat that for many years and the base keeps growing, so each year’s gain is bigger than the last. The growth is not a straight line; it curves upward, gently at first and then steeply, which is why the later years do most of the heavy lifting.

Why early beats big

Because compounding needs time, a modest amount invested early can outgrow a larger amount invested later. The years are the ingredient you cannot buy back. Someone who starts a small SIP in their twenties can end up ahead of someone who invests far more but starts in their forties. See it in one picture in what a monthly SIP can grow to.

The two sides of it

Compounding works for you in investments and against you in debt, where unpaid credit card interest compounds the same way. And inflation quietly compounds too, eating into what your money will buy, which is why your returns need to beat it. Learn the idea fully in how compounding works.