Compound interest is the money paid on interest you have already earned or paid. It’s a simple idea, with very powerful effects.
Here’s how it works. Stash some money in savings, and you’ll earn interest. Then the next year, you earn interest on your original savings, plus interest on the interest you earned in the first year. In the third year, you earn interest on your original savings, plus interest on the interest earned in the first two years. The difference starts out small but really grows over time, as year after year, your interest payments get larger.
Like a snowball rolling down hill, your interest payments get bigger and bigger, and your balance grows faster and faster.