Actually to understand money one has to understand the mechanics of compounding. In affect you are talking about the present and future values of money. Understanding the future value of money is critical to know in planning for your retirement. You can also use your understanding of compounding to determine what you need for a major purchase. It will tell how much you need to save and how long it will take. If there is one lesson in life you should learn it is the power of compounding……learn it, and use it you will be richly rewarded. Simply put…Compound interest is the concept of adding accumulated interest back to the principal, so that interest is earned on interest from that moment on. The act of declaring interest to be principal is called compounding (i.e., interest is compounded). A loan, for example, may have its interest compounded every month: in this case, a loan with $100 principal and 1% interest per month would have a balance of $101 at the end of the first month.