Compound interest is interest calculated on your original principal plus all the interest already accumulated. Because each period's earnings join the base that earns the next period's return, growth accelerates over time — the snowball effect behind long-term investing.
The longer the time horizon and the higher the rate, the more dramatic the compounding. Over decades, the majority of an investment's final value can come from compounded growth rather than the original contributions.
Related terms: Traditional IRA · RMD