Catching the Snowball Effect

When your savings earn interest, you’re paid a percentage of your total balance each time that interest is added to the account. As the balance grows, each interest payment is larger than the one before because the base has increased. Of course you could withdraw the interest and spend it, but then you’d lose the effect of compounding.

With investing, compounding can be even more powerful. Since the rate of return is typically higher on investments than on savings, you have much more to gain by reinvesting your earnings to increase your account balance.

One of the easiest ways to reinvest is to sign up for an automatic reinvestment plans when one is available, as it is with many stocks and most mutual funds. A word of caution: You won’t have a positive investment return every year, so your account value may not grow even if you reinvest. But don’t let that discourage you.

 

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