Compounding returns refers to the process of earning returns on both your original investment and the returns that have been reinvested. In simple terms, it’s when your investment generates earnings, and those earnings are reinvested to generate even more earnings over time. This creates a snowball effect, where your wealth grows at an accelerating rate.

The power of compounding is especially strong over long periods. Even modest investments can grow significantly if left to compound for years. For example, if you invest £1,000 at a 7% annual return, after one year, you would earn £70. If you reinvest that £70, the next year, you’ll earn 7% not just on your initial £1,000 but also on the £70, leading to more earnings.

The key to maximizing the benefits of compounding is time and reinvestment. The longer your money is invested, and the more consistently you reinvest the returns, the more significant the growth. Compounding works best when started early, as the exponential growth takes time to accumulate.

In summary, compounding returns can significantly boost your wealth over time by reinvesting both your initial capital and the returns it generates.