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How powerful is compounding as a tool for growing your money?

Compounding has been called the "eighth wonder of the world" - and with good reason.

There are dramatic benefits to using time - the secret of compounding -- to grow your investment. To a very large degree, the size of the nest egg you end up with depends on how much time you give your money to compound. The earlier you start the better. Also important, of course, is how much money you save each year, and what the rate of return is on your money. Let's look at two examples. We'll assume we're investing money that, in each case, earns an annual return of 10%. This growth is sheltered from taxes each year because it's in a tax-deferring plan, which it would be if it was in your RRSP. Rebecca gets the magic on her side by investing early. She starts at age 19, saving $2,000 per year for eight years. She's actually only invested a total of $16,000. At age 65, her RRSP is worth $1,035,161. Abdul starts later, at age 27. He invests $2,000 a year for 39 years. Even though he puts in $78,000 -- more than five times as much -- he ends up with less than Rebecca. At age 65, he has $883,185 in his RRSP. As you can see, the sooner you start investing, the bigger your retirement pot will be. This is because you'll have the magic of compounding on your side. Compounding uses time to multiply investment returns. If you invest a relatively small amount early, you can end up with more money than someone who starts investing larger amounts later.