Compound Interest The process by which investment returns generate further returns, earning interest on interest, and returns on returns, causing wealth to grow exponentially over time.
Compound interest is the foundational concept behind long-term investing. When your investment generates a return, that return is added to your principal, and next year’s return is calculated on the larger balance. The longer the time horizon, the more dramatic the effect. A £10,000 investment at 7% annual return grows to £38,697 after 20 years and £76,123 after 30 years, not because of contributions, but because of returns compounding on top of previous returns. Einstein is apocryphally credited with calling it the eighth wonder of the world. Whether or not that’s true, the mathematics are genuinely extraordinary for patient, long-term investors. Related terms:  Time value of money, Rule of 72, ISA, long-term investing Full page:  nofrillsinvesting.com/glossary/compound-interest/