Compounding interest
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Compounding interest is when interest earned adds to the principle for any future calculation of interest received. So a bank account that is compounded yearly that pays 4% interest and has $1,000 in the account would see the total value in the account be $1,040 after the first year ($1,000 * .04 = $40 interest earned), but it would increase to $1081.60 after the second year ($1,040 * .04 = $41.60 interest earned). As more time goes by, the amount of interest received will continue to increase.