Financial Tools & Resources

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.

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

  1. Find the estimated rate of return for your investment.Past performance doesn't guarantee future results, but tells you how it can perform in different market conditions.
  2. 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).

xmlns="">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

The illustration above is 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.

Saving Early is Important

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%
Value of Investment at Age 65 $425,304 $206,661

Have Questions About Investing?

The answer is an easy one: talk with your State Farm® representative who will discuss your current needs and opportunities and help you develop a plan to fit your goals. Simply click, call, or stop by an office in your neighbourhood today!


Mutual Funds are not insurance products and are distributed through representatives of State Farm Investor Services (Canada) Co. State Farm Investor Services (Canada) Co. is a separate legal entity from State Farm Mutual Automobile Insurance Company, or any of its insurance affiliates.

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 State Farm nor its agents provide tax or legal advice. Please consult a tax or legal advisor for advice regarding your personal circumstances.

State Farm Investor Services (Canada) Co. Aurora, Ontario.