Compounding interest is a mental model for building long-term wealth and success by consistently reinvesting earned interest.
Compounding interest is the process by which an investment grows over time as the interest you earn starts earning its own interest. For instance, if you deposit $1,000 in a bank with an annual interest rate of 5%, you will have $1,050 by the end of the first year. If you leave all your money in the bank, at the end of the second year, you will have $1,102.5. This happens because during the second year, your interest has been calculated on the initial amount plus the interest earned in the first year. Given enough time, this process can lead to exponential growth of your wealth.
Compound interest is the eighth wonder of the world. He who understands it, earns it...he who doesn't...pays it. - Albert Einstein
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