What impact does compound interest have on an investment over time?

Compound interest has a powerful impact on an investment because it allows earnings to generate additional earnings over time. This effect occurs because interest is calculated not only on the initial principal amount but also on the accumulated interest from previous periods. As a result, the growth of the investment accelerates, leading to a greater total amount earned as time progresses.

The key feature of compound interest is that it compounds, meaning that the interest earned in one period becomes part of the principal for the next period. This principle leads to exponential growth: the longer the money is invested, the more significant the impact of compounding becomes. Therefore, an investment can grow at a much faster rate than if it were subject only to simple interest, which is calculated solely on the initial principal.

When considering long-term investments, the benefits of compound interest become even more pronounced, making it one of the most effective strategies for wealth accumulation over time.