Compound interest is one of the most powerful forces in personal finance, and understanding how it works can make a huge difference in your savings and investments. Unlike simple interest, which is calculated only on the principal, compound interest is calculated on both the principal and any accumulated interest. This creates a snowball effect, where your money grows faster over time.

The longer your money is invested or saved with compound interest, the more dramatic the growth. This is why starting to save or invest early can have such a significant impact on your future wealth. Compound interest is the secret behind many retirement savings accounts and investment strategies.

But can you identify the correct definition of compound interest? Let’s put your knowledge of financial growth to the test!