Which of the following is a benefit of compound interest?

The benefit of compound interest lies in its ability to allow interest to earn more interest. This characteristic makes compound interest a powerful tool for building wealth over time. When interest is calculated on both the initial principal and the accumulated interest from previous periods, the total amount of money grows at a faster rate compared to simple interest, which is only calculated on the principal amount.

This feature of compounding means that as time goes on, the amount of interest earned each period increases because it is being calculated on a larger base, leading to exponential growth of the investment or savings. As a result, individuals who take advantage of compound interest over long periods, like those saving for retirement or making investments, can significantly increase their total assets compared to those who might only earn simple interest.

Understanding the impact of compound interest highlights the importance of time in saving and investing, as the longer money is left to grow, the more affluent the outcome can be.