The eighth wonder of the world, apparently! Compounding is a key concept for savers, investors (and people with debt!) and acts like a snowball running down a hill.
Compounding is the effect of reinvesting income from an initial investment, over a period of time.
This means when you earn income on your initial investment and reinvest that income to buy more shares, the next time you get paid it’s based on a bigger number of shares.
Compounding allows your wealth to grow exponentially, and if left to accrue over long periods, can provide a significant buffer against inflation, rising living costs and reduction in the value of currency.
Put very simply, compounding your investment income is like a snowball getting bigger as it rolls down the hill.