The idea of compounding money is a relatively simple one. You put money into a savings/CD/money market/other investment, and leave it there. The interest is reinvested in the fund each year, and in turn helps generate more interest. At first, your returns will be relatively steady and modest. However, as time goes on and more interest is added to your principle, the value of your investment quickly begin to curve upwards. The power of compounding relies on two factors: interest rate/rate of return, and length of investment.

Suppose you have $10,000, and decide to invest it in an investment with an estimated 8% return. In the first year, you will earn $800 on your investment. The next year, you will earn 10,800*.08 or about $864. After 10 years, the balance will be at $21,589. After 20 years, your initial investment of $10,000 will have quadrupled to $46,610! Of course, the earlier you start, the more time your money will have to compound. That’s why starting early is so crucial.

The other factor is the interest rate. Suppose instead of 8%, you put your money in a vehicle earning 5%. After 10 years, your running balance would be only $16,289. And after 20, $26,533. The difference becomes even more drastic when you lower the rate to 2% or 1%. In a regular savings account, you’re probably earning next to nothing. Your money is probably barely keeping up with inflation. This is why finding the best CD rate is so crucial.

Here is a financial calculator that helps demonstrates the power of compounding. It’s a pretty simple applet, but it allows you to see that the longer you invest your money, the greater the rewards will be. For another example on the power of starting early, check out this article at mindyourfinances.com.

Some vehicles of investment include certificate of deposits (CD), mutual funds, treasury bills, government or corporate bonds, ETFs, and money market accounts.