Albert Einstein is credited as having said “compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.”

While there is some conjecture over whether Einstein really did make this statement, it’s hard to deny that compound interest is indeed a very powerful, wealth building tool.

Here’s a practical example which highlights the beauty of compounding your money.

Imagine you could save $6,000 per year – that’s the equivalent of putting aside $500 every month.

From a standing start (let’s assume from age of 34) you begin setting aside $6,000 each year and investing it in the stock market.

For argument’s sake, we’ll figure you achieve a 10% return per annum (pa) on your investments – that’s certainly no slouch for a return, but it’s also not an impossible achievement either.

Consider this…

Listed investment companies (LIC) Australian Leaders Fund Limited (ASX: ALF) and WAM Capital Limited (ASX: WAM) have achieved total shareholder returns (TSR) of 11.9% per annum (pa) and 9.7% pa respectively over the past 10 years.

Meanwhile, Magellan Financial Group Ltd’s (ASX: MFG) flagship global fund has returned 10.8% pa since inception 9 years ago.

The maths is quite straight forward…

An investment plan committing $6,000 every year for 30 years at a rate of 10% pa will grow – thanks to the beauty of compounding – into $1,091,661 by the time you are 65.

Who wants to retire a millionaire?

There are a few key takeaways from this example.

Firstly, it takes time to build wealth. The earlier you start and the longer you allow your wealth to compound the better.

Secondly, compounding is a must! That means not touching the money you put in and reinvesting all the profits too. It’s worth noting that under this example ‘only’ $186,000 of savings are contributed over those 30 years; the balance of $905,661 is all thanks to compounding.

Thirdly, returns matters and can make a big difference. Whilst 10% pa was used in this example, a review of the returns achieved by successful long-term investors such as Warren Buffett shows that even higher returns are possible. Taking the time to carefully construct a portfolio that will maximise your returns can make a huge difference to your wealth.

It would be naive to say that getting rich is easy. By utilising the above steps however, it certainly can be achievable.

How 1 Man Made 100x His Money After 50

Few know, that as Warren Buffett blew out the candles on his 50th birthday cake, he had just 1% of his current fortune. Think about it: At an age when most give up hope, Buffett was just getting started on the remaining 99% of his fortune. Goes to show you that it's never too late for you to potentially get rich. Which is why we've gathered the strategies we learned from Buffett, distilled them down to 11 simple lessons, and put it in an exclusive report for you to claim. Just click here to learn more about this handy investing guide.

HOT OFF THE PRESSES: Motley Fool’s #1 Dividend Pick for 2017!

With its shares up 155% in just the last five years, this ‘under the radar’ consumer favourite is both a hot growth stock AND our expert’s #1 dividend pick for 2017. Now we’re pulling back the curtain for you... And all you have to do to discover the name, code and a full analysis is enter your email below!

Simply enter your email now to receive your copy of our brand-new FREE report, “The Motley Fool’s Top Dividend Stock for 2017.”

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our https://www.fool.com.au/financial-services-guide">Financial Services Guide (FSG) for more information.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.