Compound interest : interest paid on previously earned interest as well as on the principal.

compound interest is interest earned on interest and makes a huge difference to the value of long term savings. say you"ve invested £100, which is earning 10% interest each year.

year 1, you earn 10% on £100 = £110

year 2, instead of earning another 10% on your £100, you earn 10% on £110 = £121

year 3, you earn 10% on £121 = £133.10

and so on, so longer you leave it, the more you benefit from compounding.

the process by which interest earned on an investment is added back to the amount invested, so increasing the amount of "principal" on which further interest will be earned in future years.compounding is sometimes described as the miracle of investing. the fact is that if you reinvest income in your portfolio, you will end up with a much larger amount than if you spend the income as you go along because of the effect of compounding. but to allow compounding to work its magic, you have to start young.albert einstein, when asked what he considered to be mankind"s greatest invention, replied "compound interest!"