What is compound interest?

compound interest occurs when the interest you earn on the principal amount of an investment (or loan) is added back to the principal – more simply put, you earn interest on your interest. another way to think about this is instead of pocketing the interest you make on an investment, you actually reinvest it, increasing the principal amount. as a result, this will make the sum grow much quicker than if you were receiving simple interest where interest is only accrued on the original principle. although this may sound like a small distinction, the difference can have extremely large impacts.