How does compound interest benefit an individual over time?

Compound interest benefits an individual over time by accumulating interest on interest. This means that not only does the initial principal amount earn interest, but the interest that is added to the principal also begins to earn interest in subsequent periods. Over time, this can lead to exponential growth of savings or investments. The longer the money is allowed to compound, the more significant the effect becomes, as the potential for growth increases with each compounding period.

This principle is particularly powerful in long-term investments, where the time value of money can greatly enhance the overall returns. For instance, someone who invests early and allows their investments to compound over numerous years will likely see a much larger return than someone who starts investing later on. This becomes a crucial component of wealth-building strategies advocated in personal finance practices. Understanding how compound interest works empowers individuals to make better financial decisions, such as prioritizing savings and investing early to maximize their wealth over time.