How does compound interest work?

Compound interest is the process where interest is earned not only on the initial principal but also on the accumulated interest from previous periods. This creates a snowball effect where money grows faster over time compared to simple interest, which only applies to the original amount. The formula for compound interest considers the principal, interest rate, number of compounding periods, and time. The more frequently interest compounds, the greater the total growth. This concept benefits savers and investors, as their funds can increase significantly over long periods. However, it can also work against borrowers with debts, such as credit cards, where balances grow quickly if unpaid. Understanding compound interest helps people make smarter financial decisions.