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** This lesson is generated with AI assistance and approved by Danny Nelson. This lesson will communicate the essence of the topic for now until Danny can create a full lesson. **
Compound interest is the process where interest is earned not only on the initial amount invested or borrowed (the principal) but also on the accumulated interest from previous periods, causing money to grow exponentially over time.
Unlike simple interest, which is calculated only on the principal, compound interest accelerates growth because each period’s interest is added to the base amount for the next calculation.
For example, $1,000 invested at 5% annual interest compounded yearly will grow faster than the same amount with simple interest.
Starting early and compounding frequently is one of the most powerful ways to build long-term wealth or, conversely, why high-interest debt can quickly become unmanageable.