In personal finance, earning interest on both original money and previously earned interest is called compound interest.
With simple interest, returns are calculated only on the original principal. With compound interest, accumulated interest becomes part of the balance used for later calculations. The effect can accelerate growth when money remains invested or saved for a long period.
Compounding frequency matters. Interest may compound annually, monthly, daily, or at another interval, depending on the account or loan terms. A higher rate and more frequent compounding generally increase the result, although fees, taxes, and withdrawals can reduce it.
Compound interest also works against borrowers. Credit-card balances and other debts can grow when unpaid interest is added to the amount owed. This is why early saving and timely debt repayment are powerful long-term habits.