As Albert Einstein famously said, “Compound interest is the eighth wonder of the world.”

The magic of compounding interest is one of the most powerful forces in building long-term wealth. It works quietly in the background, growing your money year after year simply by reinvesting earnings.

So how does it actually work? Compounding is the process of earning returns not just on your original investment, but also on the returns that investment generates over time. For example, if you invest $10,000 and earn a 7% return in the first year, you’ll have $10,700. In the second year, your 7% return is calculated on $10,700—not just the original $10,000. That snowball effect continues to grow, and over decades, the difference can be enormous.

This is why time in the market is so much more important than trying to time the market. Consider two investors. One starts investing $5,000 per year at age 25 and stops after 10 years. The other starts at age 35 and contributes the same amount every year until they’re 65. Even though the second investor puts in much more money overall, the first investor often ends up with more at retirement—simply because their money had more time to grow.

Trying to jump in and out of the market to “buy low and sell high” might sound like a good idea, but it’s extremely difficult to do consistently. Markets move quickly, and some of the biggest gains often happen in short bursts. Miss just a handful of the best-performing days and your long-term returns can take a major hit. For instance, if an investor missed the 10 best days in the ASX over the past 20 years, their total return could be cut in half. That’s a costly mistake that many market timers unknowingly make.

That’s why staying invested through the ups and downs is often the most effective approach. Yes, markets will dip. Yes, volatility is normal. But over time, markets have historically trended upward. By sticking to a long-term plan and resisting the urge to react emotionally to short-term swings, you give compounding the opportunity to work its magic.

In investing, time really is money. The earlier and longer you stay invested, the more powerful the results. Let compounding do the heavy lifting, your future self will thank you.