What is compound interest?

Compound interest refers to the interest that is calculated not only on the initial principal amount but also on the interest that has previously been added to that principal. This means that as time goes on, the total amount of interest you earn grows because interest is calculated on an increasingly larger amount. This concept is crucial in many financial contexts as it can significantly increase the amount of money earned over time compared to simple interest, which is only calculated on the principal.

Understanding compound interest is fundamental in fields such as finance and investment, as it highlights the benefits of long-term savings strategies and the power of reinvesting earnings to increase wealth over time.