Compound Interest: How It Grows Your Wealth Over Time

Compound interest is the process of earning interest not only on your initial principal but also on the accumulated interest from previous periods. Unlike simple interest, which is calculated only on the principal, compounding allows your investments to grow at an accelerating rate as the interest you earn begins to generate its own earnings.

The power of compound interest becomes more apparent over longer time horizons. For example, investing a modest amount regularly in a retirement account or mutual fund can result in substantial growth after several decades because each period’s interest adds to the principal for the next period. The sooner you start investing, the more time compound interest has to work in your favor.

To maximize the benefits of compounding, reinvest your earnings and maintain a consistent contribution schedule. Even small increases in your contribution rate can significantly impact the final balance over time. Compound interest is a key reason why long-term investing and disciplined saving are critical components of building wealth.