How does compound interest work?

Certainly! Compound interest is the process where the interest you earn on an investment or savings is added back to the original amount (the principal), so that in the next period, you earn interest on both the principal and the previously accumulated interest. This “interest on interest” effect helps your money grow faster over time compared to simple interest, which is calculated only on the original principal. Here’s a simple real-world example: Imagine you put $1,000 into a savings account with an annual interest rate of 5%, compounded once a year. After the first year, you earn 5% of $1,000, which is $50, so your total amount becomes $1,050. In the second year, you earn 5% interest on $1,050 (not just the original $1,000), which is $52.50. Now your total is $1,102.50. Each year, the interest is calculated on the new total, so your savings grow faster over time. This compounding effect becomes more powerful the longer you leave your money invested or saved. The more frequently the interest is compounded (quarterly, monthly, daily), the faster your investment grows. That’s why compound interest is often called “the eighth wonder of the world” — it can significantly increase your wealth over time with patience and consistent saving.