What is significant about compound interest?

Compound interest is significant because it allows interest to earn interest over time. This means that not only does the initial principal amount accrue interest, but the interest that has been added to the principal also begins to generate its own interest. This compounding effect can lead to exponential growth in savings or investment balances, making it a powerful tool for building wealth over time.

In practical terms, the more frequently interest is compounded—such as annually, semi-annually, quarterly, or even daily—the greater the total amount of interest earned will be. This concept emphasizes the importance of starting to save early and being consistent, as even small amounts can grow substantially due to the effects of compounding.