Compounding is the process where the value of an investment grows over time due to earning interest on both the initial amount and the interest that has already been added. For example, if you invest money in a savings account, the bank pays you interest. As this interest is added to your account, you earn interest on the new total, leading to faster growth. This concept is often summarized by the phrase "interest on interest." The longer you leave your money invested, the more pronounced the effects of compounding become. This is why starting early with investments, like in a 401(k) or IRA, can significantly increase your wealth over time.