Compound Interest
Earning returns on both your original money and the returns it has already generated — the engine behind long-term wealth.
Compound interest (or compound growth) is the process of earning returns on your returns. In year one you earn on your principal; in year two you earn on the principal plus year one's gains, and so on. Over decades this snowball effect dominates outcomes — most of a lifelong investor's final balance is growth on growth, not the contributions themselves.
Time is the most powerful variable. Because compounding accelerates, the early dollars you invest do far more work than later ones, which is why starting young matters so much and why Coast FIRE becomes possible once enough time remains for existing assets to compound.
Inflation compounds too, in the opposite direction, eroding purchasing power. That's why planners distinguish nominal growth from real (inflation-adjusted) growth — the real rate of return is what actually builds buying power.
This definition is general information to help you understand a term, not financial, tax, or legal advice. Figures that change year to year (limits, thresholds, rates) should be confirmed against current official sources. For guidance on your situation, a licensed fee-only fiduciary is the right next step.