Compound interest is interest that is calculated on both the initial principal and the interest that has been added to it over time. This means that you earn interest on your interest. The more frequently interest is compounded, the higher the effective rate. For example, if you invest $100 at an annual interest rate of 5% compounded annually, you will have $105 at the end of the first year. However, if the interest is compounded quarterly, you will have $105.06 at the end of the first year. Compound interest can work for you when saving and investing, but it can also work against you when borrowing money. This is because the interest you owe is added to the principal, resulting in a higher overall amount to repay. Understanding how compound interest works is essential for making informed financial decisions. It is important to start saving and investing early to take advantage of the power of compound interest. Time is a crucial factor in maximizing the growth of your investments through compound interest.