How does compound interest benefit savings over time?

Compound interest benefits savings over time because it allows interest to be calculated on both the principal amount and the accumulated interest from previous periods. This means that as time goes on, not only does your initial investment earn interest, but the interest that has already been added to your account also earns interest. This creates a snowball effect, where the amount of interest earned grows exponentially over time instead of linearly.

For example, if you invest money in a savings account that compounds interest, each period's interest is added to your principal, increasing the total balance. The next time interest is calculated, it is based on this larger amount, which includes both the original principal and any previously earned interest. Over years, this effect can significantly boost the overall return on your investment, demonstrating the powerful impact of compound interest on savings strategies.

The other choices do not accurately describe the nature of compound interest. Limiting investment options is unrelated to how interest accumulates, while calculating interest only on the initial principal or generating fixed interest yearly describes simple interest, which does not take advantage of the accumulated interest effect.