Compounding is the process where the value of an investment grows over time due to earning interest on both the initial principal and the accumulated interest from previous periods. This means that the longer you keep your money invested, the more it can grow, as interest is calculated on an increasing amount. For example, if you invest in a savings account or a mutual fund, the interest earned in one period is added to the principal, and in the next period, interest is calculated on this new total. This effect can significantly increase wealth over time, making compounding a powerful financial concept.