Compound interest is interest calculated on both your original balance and the interest you have already earned. In short, it is "interest on interest" — and over time it makes a meaningful difference.
Compound vs. simple interest: simple interest is paid only on your original deposit. Compound interest is paid on the original deposit plus all the interest added so far, so each period starts from a slightly larger balance.
Why it matters for savings: the longer your money stays invested and the more often it compounds, the faster it grows. Starting early is powerful — even small, regular deposits build up because every dollar of interest then earns its own interest.
Three things that strengthen compounding:
- Time — the single biggest factor; growth accelerates the longer you leave funds in place.
- Rate — a higher APY compounds faster.
- Consistency — regular contributions give compounding more to work with.
Compounding works against you on debt. The same math applies to balances you owe — credit card interest typically compounds, so an unpaid balance grows on its own. That is why paying debt down quickly saves money.
To put compounding to work, consider automatic savings transfers, and review how APY reflects compounding when comparing accounts.