Definition
Interest earned on both your original money and the interest it already earned. It is the engine of long-term investing, and of credit card debt when it runs against you.
Why it matters
Compounding is why starting early beats saving more later, and why credit card debt feels like quicksand. The same force works for or against you depending on which side of the interest you sit.
Example
$500 a month at a 7% average return becomes roughly $610,000 in 30 years, of which only $180,000 was deposited. The remaining $430,000 is compounding doing the work.
Put it into practice
Related terms
This definition is educational, not financial, legal, or tax advice. U.S. rules and limits change; verify time-sensitive details with official sources. See our disclaimer.