What does compound interest represent?

Compound interest signifies the interest that is calculated on both the initial principal and also on the accumulated interest from previous periods. This means that as time goes on, the interest earned becomes part of the principal, which then earns interest in subsequent periods. This process increases the total amount of interest earned over time compared to simple interest, which only applies to the original principal.

Understanding compound interest is essential for personal finance, as it can significantly affect savings, investments, and loans. It highlights the powerful effect of time and reinvestment in building wealth, making it a crucial concept in saving and investment strategies.