How does compounding interest benefit savers?

Compounding interest benefits savers by allowing interest to be calculated on the total balance, which includes both the initial principal and the interest that has already been earned. This means that over time, the amount of interest a saver earns increases because interest itself begins to earn interest. This effect can significantly increase the growth of savings over time, particularly when savings are left to accumulate for several years or decades.

For example, if you earn interest on your savings account balance and then leave that interest in the account, your future interest calculations are based on a larger balance. This creates a snowball effect, where the growth accelerates the longer the money is invested or saved.

The other options don't accurately describe how compounding interest works. The first option implies that interest is only based on the principal, which does not leverage the power of compounding. The third option suggests that compounding makes a savings account unnecessary, which is not true; compounding actually benefits savings accounts. Lastly, the fourth option incorrectly states that compounding reduces overall interest earned; in reality, it increases it by taking into account previously earned interest.