Interest compounding methods

Interest compounding refers to the process where earned interest is added to the principal, so future interest is calculated on a larger amount. Common methods include annual compounding, where interest is added once a year; semi-annual, twice a year; quarterly, four times a year; and daily, every day. The more frequently interest is compounded, the faster the investment grows because interest accumulates on previous interest more often. This concept benefits savers and investors by increasing returns over time, making it important to understand the compounding frequency when evaluating different financial products.