What Is Compounding? — Interactive Compounding Animation
What Is Compounding?
The basic idea behind compounding is a simple one: as you get returns on your investments, say in the form of dividends, and if you reinvest those returns, the next time you receive dividend you will get an even bigger dividend payment. This is because you are receiving not only a dividend payment on the original principle investment amount but also on the prior dividend payouts that have since been added to the original principle.
What is often under-appreciated, at least until you see the math for yourself, is just how powerful the effect of compounding can be. By investing a modest amount regularly, and by reinventing the return on your investments—again, say, in the form of dividend payments—you can obtain a counterintuitively large sum of money in the long term, say over 25 or 30 years. In fact, an extra five years can make a huge different in the amount of money that you end up with, which is all the more reason to start investing as early in your life as possible.
Interactive Compounding Animation
To demonstrate the power of compounding, I developed the following interactive compounding animation. Using this animation, you’ll be able to see, visually, the growth of an investment over time. Starting with an initial investment of $1,000, you can control the percentage return for any given year and see the effects of compounding on your investment account balance year after year.
Although there are other compound interest calculators out there, I’m particularly proud of the way that my interactive compounding animation gives you a visual representation of how your money can grow over time as a result of compounding.
Full-Screen Version
A full-screen version of this interactive compounding animation is available here (try this version if the embedded version above isn’t working for you):
Technical Description
I programmed this interactive compounding animation in JavaScript and p5.js. For more on how to program interactive animations like this in p5.js, see the following resources:
Additional Resources on Compounding
For more on the using the power of compounding to supercharge your investment strategy over the long term, see the following resource:
