It's been said that Einstein called compounding a wonder of the world. He probably didn't, but it is a wonder. Compounding is the process by which we add interest to a fixed sum, which then earns interest on the previous sum and the newly added interest, and then earns interest on that amount, and so on ad infinitum. It is an exponential effect, rather than a linear, or additive, effect. Money is not the only thing that compounds; ideas and relationships do as well. In tangible realms, compounding is always subject to physical limits and diminishing returns; intangibles can compound more freely. Compounding also leads to the time value of money, which underlies all of modern finance.