Magic!

Albert Einstein once described compound interest as the eighth wonder of the world, saying “he who understands it, earns it; he who doesn’t, pays for it.”

Here’s a simple definition to help you understand it:

Compound interest is when you earn interest on both the money you’ve saved and the interest you earn. The earlier you begin to save the more compound interest you earn. This same definition can be applied when you invest in shares.

On the assumption that most investors won’t really need their dividend income to meet their day-to-day expenditure, automatic reinvestment of ongoing dividends will gives a double whammy. As the number of your shares grow the dividends you earn will increase, but additionally you’ll also most likely get a tax deduction in the form of franking credits from most dividends – maybe even a refund.

Not all listed companies offer a dividend reinvestment plan, but even if they don’t, you can apply the principle yourself. It may come with a small additional cost for brokerage, but it’s a most satisfactory way of building wealth.