Compound interest is the reason a balance left alone grows faster in its later years than in its early ones. Interest is added to the balance, and from then on that interest earns interest too. This lesson explains the arithmetic behind that, using one small example carried through from start to finish.
It matters because the same arithmetic sits underneath most of personal finance: savings accounts, loans, credit cards and the long-run growth of investments. A reader who can follow it for one balance can follow the rate printed on almost any account statement, and can see why two accounts with the same stated rate do not always pay the same amount.