How does compound interest work, and why is it so important for long-term investment growth?

Compound interest is the process where the interest earned on an investment is added to the principal amount, and future interest is calculated on this new total. Essentially, you earn interest on both the original investment and the accumulated interest. Over time, this leads to exponential growth, as the interest builds on itself. Compound interest is particularly important for long-term investment growth because it allows wealth to grow faster the longer the investment is held. The earlier you start investing, the more time your money has to compound, significantly boosting returns over the long run.