Compounding your investments
Whether you're investing for retirement, higher education or a new home, knowing how quickly your investments may grow will help your decision-making process. Reinvesting, or compounding, your earnings can make a difference in your investment account's growth.
For more information, contact DFS Investments. They can help you develop a plan to fit your financial goals.
What is compounding?
Compounding occurs when you reinvest your earnings and/or dividends in the fund. You may not see the benefits of compounding right away but as earnings begin to accumulate, growth can gain momentum.
Use the Rule of 72 to see how soon your investment may double
How the Rule of 72 Works
- Find the estimated rate of return for your investment. Past performance doesn't guarantee future results, but it can tell you how it can perform in different market conditions.
- Divide 72 by your estimated rate of return. For example, money invested in a fund with an estimated return of 6% may double in 12 years (72/6 = 12).
Using the Rule of 72, the chart below shows you how compounding might play out over a 20-year period with a $1,000 investment. We used a 6% estimated rate of return.
Years invested ending balance
Year 1 — $1,060
Year 2 — $1,124
Year 3 — $1,191
Year 4 — $1,262
Year 5 — $1,418
Year 6 — $1,503
Year 7 — $1,593
Year 8 — $1,689
Year 9 — $1,790
Year 10 — $1,897
Year 11 — $2,011
Year 12 — $2,132
Year 13 — $2,260
Year 14 — $2,396
Year 15 — $2,540
Year 16 — $2,692
Year 17 — $2,854
Year 18 — $3,025
Year 19 — $3,207
Year 20 — $3,399
Year 21 — $3,603
Year 22 — $3,819
Year 23 — $4,048
Year 24 — $4,291
Year 25 — $4,548
Year 26 — $4,821
Year 27 — $5,110
Year 28 — $5,417
Year 29 — $5,742
Year 30 — $6,087
Year 1 — $1,060
Year 2 — $1,124
Year 3 — $1,191
Year 4 — $1,262
Year 5 — $1,418
Year 6 — $1,503
Year 7 — $1,593
Year 8 — $1,689
Year 9 — $1,790
Year 10 — $1,897
Year 11 — $2,011
Year 12 — $2,132
Year 13 — $2,260
Year 14 — $2,396
Year 15 — $2,540
Year 16 — $2,692
Year 17 — $2,854
Year 18 — $3,025
Year 19 — $3,207
Year 20 — $3,399
Year 21 — $3,603
Year 22 — $3,819
Year 23 — $4,048
Year 24 — $4,291
Year 25 — $4,548
Year 26 — $4,821
Year 27 — $5,110
Year 28 — $5,417
Year 29 — $5,742
Year 30 — $6,087
The figures above are intended to show the principle of compounding. This hypothetical chart is for illustrative purposes only and doesn't represent any specific type of investment. It doesn't include the impact of expenses or fees, which would have reduced the results of the illustration.
As you can see, compounding made a small difference in the ending balances during the early years. However, as more earnings were added, compounding made a significant difference over time. Remember, this is a simplified example.
The importance of saving early
Time can be on your side. Saving for retirement early might make a dramatic difference in reaching your financial goals. In the example below, you can see the difference an early start makes. Remember, this is a simplified example.
Hypothetical illustration
Mary
Susan
Started investing at
age 25
age 35
Yearly contribution
$5,000
$5,000
Number of years
10 years
20 years
Total contributions
$50,000
$100,000
Rate of return
6%
6%
Valeur des placements à 65 ans
$425,304
$206,661
Mary
Started investing at
age 25
Yearly contribution
$5,000
Number of years
10 years
Total contributions
$50,000
Rate of return
6%
Valeur des placements à 65 ans
$425,304
Susan
Started investing at
age 35
Yearly contribution
$5,000
Number of years
20 years
Total contributions
$100,000
Rate of return
6%
Valeur des placements à 65 ans
$206,661
Mutual Funds are not insurance products and are distributed through representatives of Desjardins Financial Security Investments Inc.
Please read the applicable Fund Facts before investing. Commissions, trailing commissions, management fees and expenses may be associated with mutual fund investments.
Mutual Funds are not guaranteed, their values change frequently and past performance may not be repeated. Mutual fund securities are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer.
Neither Desjardins Insurance nor its agents provide tax or legal advice. Please consult your tax, legal or investment advisor regarding your specific circumstances