Compounding

The process of applying investment growth not only to the original investment, but also to income and gains reinvested in prior periods. For example, if you earn compound interest on savings, you earn interest on the accumulated interest. If you earn simple interest on savings, you earn interest based only on the principal amount. Suppose you earn simple interest at 4.5% on $10,000 for 25 years. The interest earned over 25 years would be $11,257.40—the future value of your savings would be $21,257.40. However, if you earn compound daily interest at 4.5%, on $10,000 for 25 years, the interest earned would be $20,822.82—the future value would be $30,822.82.