Compound interest is the interest you earn not just on your original amount (known as the principal) but also on the interest that accumulates over time. In simple terms, it’s “interest on interest.
Here’s an example:
If you invest $1,000 at a 5% annual interest rate, after one year, you’ll have $1,050. In the second year, the 5% applies to $1,050—not just the original $1,000. So, you earn more than the first year. Over time, this effect multiplies, and your money grows faster and faster.