How does compounding differ from simple interest according to the chapter?

Compounding differs from simple interest in that compounding involves earning interest on both the original principal and any previously earned interest, while simple interest is calculated only on the original principal amount.

Compounding allows an investment to grow more significantly over time because it includes interest earned on interest, leading to a larger future value. In contrast, simple interest is calculated solely on the initial principal, meaning that the interest does not increase as the investment grows. This results in a lower total amount earned compared to compounding over multiple periods.