Compounding is the process where the returns you earn on an investment begin to generate their own returns over time. Imagine you invest a certain amount of money, and after a year, you earn interest on it. In the following year, you don’t just earn interest on your original investment, but also on the interest you earned the previous year. This cycle continues, causing your money to grow at an accelerating rate. Compounding is often described as the 'snowball effect' in finance, where small gains accumulate and build upon themselves, leading to significant growth over time. This foundational idea is key to long-term wealth building.