Compound Interest

Definition: Compound interest is the interest earned on both the initial principal amount and the accumulated interest from previous periods. Over time, this creates a compounding effect, allowing your money to grow faster compared to simple interest.

Example: If you invest $1,000 at an annual interest rate of 5% compounded annually, after one year, you earn $50 in interest. In the second year, you earn interest on $1,050, resulting in $52.50, and so on, with the amount growing each year.