The effect of compounding can help you grow your wealth faster, and is the best way to work towards your retirement goals. If you’re fuzzy on the difference between interest and investment returns, here’s a primer on how it all works, so you can project when you’ll reach your goals more accurately.

What is compounding interest

Compound interest refers to interest that you will earn on your original deposit and on the interest that your money earns over time. This form of interest applies to both deposits and loans. Bank savings accounts work on compounding interest. To help visualise this, here’s how simple interest and compounding interest work over 60 days. Example: (Based on a starting balance of $20,000)

Period	Compounding interest	Simple interest
	Interest rate: 1%p.a. compounded monthly	Interest rate: 1% p.a.
In the first 30 days	Interest earned: $20,000 x 1% x 30/365days=$16.43 Total balance: $20,000 + $16.43 = $20,016.43	Interest earned: $20,000 x 1% x 30/365days=$16.43
Next 30  days	Starting balance in the account: $20,016.43Interest earned: $20,016.43 x 1% x 30/365days =$16.45 Total balance: $20,016.43 + $16.45 = $20,032.88	Interest earned: $20,000 x 1% x 30/365days=$16.43
End of 60 days	Final balance: $20,032.88	Final balance: $20,032.86

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