compound interest

Compound interest is the process by which interest earned on an investment is added to the principal amount, allowing future interest to be calculated on both the initial principal and the accumulated interest. This results in exponential growth over time. For example, if you invest $1,000 at a 5% annual interest rate, you’ll earn $50 in the first year. In the second year, interest will be calculated on $1,050, resulting in $52.50. Over time, this compounding effect means your investment grows faster than with simple interest, which is calculated only on the initial principal.