Compound interest refers to the process by which interest is calculated not only on the initial principal but also on the accumulated interest from previous periods. This “interest on interest” effect causes money to grow at an accelerating rate over time, making it a powerful force in both investing and borrowing. For example, if you invest $1,000 at an annual compound interest rate of 5%, you earn interest on your initial $1,000 in the first year. In the second year, you earn interest on both the original $1,000 and the interest it generated — and this compounding continues. This concept is the foundation of long-term financial growth and is a key reason why early saving and investing can yield significantly higher returns over decades. Compound interest is used in savings accounts, investment portfolios, and many types of loans. Understanding it is crucial for maximizing financial growth and minimizing debt, depending on whether you're earning or paying the interest.