Compound Interest
Interest calculated on both the initial principal and the accumulated interest from previous periods, causing wealth to grow at an accelerating rate over time.
Compound interest means you earn interest not just on your original investment but also on all the interest you have already earned. Over time, this creates a snowball effect where your money grows faster and faster—a process often called compounding.
The key variables that determine how powerful compounding can be are the interest rate, the compounding frequency (daily, monthly, or annually), and above all, time. Starting to invest early—even with modest amounts—can produce dramatically larger results than investing more money later.
Albert Einstein is often (apocryphally) credited with calling compound interest the "eighth wonder of the world." Whether or not he said it, the math is real: a single investment left to compound over decades can grow to multiples of its original value without you adding another penny.
Disclaimer
This article is for educational purposes only and does not constitute financial advice.