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Interest compounding is when your earnings on an investment or savings account start earning their own interest, leading to faster growth over time.
In Depth
This means your money can grow faster because you're earning interest on your initial investment plus the accumulated interest. For debts, it means the amount you owe can increase quickly if you don't pay off the interest. The more frequently interest is compounded (e.g., daily vs. annually), the greater the effect.
Example
If you invest $1,000 at 5% interest compounded annually, after one year you earn $50, and in the second year, you earn 5% on $1,050, not just the original $1,000.