What is Interest Compounding?
Interest compounding is a financial concept that refers to the process of earning interest on the interest that has already been earned. In other words, it is the interest on interest. This concept is fundamental to understanding how investments and savings can grow over time. When money is invested in an account that offers compound interest, the interest earned in each period is added to the principal, and the next interest calculation is based on the new total. This leads to exponential growth of the investment, as the interest earned in subsequent periods is based on a larger principal amount. Understanding the mechanics of interest compounding can help individuals make informed decisions about saving and investing.
