Compound interest means you earn (or pay) interest on interest. If savings grow at a fixed rate and you leave the interest invested, the balance accelerates over long periods. The same force works against you on unpaid debt that capitalises interest.
Key takeaways
- Time is the main fuel; starting earlier matters more than many people expect.
- Higher compounding frequency (monthly versus yearly) raises the effective rate slightly.
- Inflation reduces the real value of nominal compounded gains.
- On loans, compounding can make late balances grow faster than simple interest would.