Compound interest is the interest you earn not only on your original principal but also on the interest already added to it. Over time this creates accelerating, exponential growth. The future value formula is principal × (1 + rate) raised to the number of periods.
Worked example
$10,000 invested at 7% per year for 30 years grows to 10,000 × (1.07)³⁰ ≈ $76,123 — more than seven times the original, with most of the gain coming from compounding in the later years.
Why it matters
Compounding is the engine behind long-term investing and FIRE: the earlier you start, the more time interest has to build on itself. It also works against you on debt, where balances can snowball.
Frequently asked questions
More frequent compounding (daily versus annual) increases the total slightly, but the rate of return and the length of time invested matter far more.