Compounding
Principles of Finance glossary · Time Value of Money
Definition
The process by which interest earns interest over time.
Compounding in plain English
Compounding is the reason money can snowball: you earn interest not just on your original amount, but also on the interest you already earned. Each period your interest gets added to the pile, and next period that bigger pile earns interest too, so growth speeds up the longer you leave it alone. It's like a rolling snowball, gathering more snow the bigger it already is. That's why starting to save early beats saving more later, because you're giving the interest time to earn its own interest.
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