What is compounding? How does it benefit me in my financial planning?

Compounding is the positive impact of interest earned on interest increasing the amount of the final value of your savings at the end of the investment horizon. E.g. When you put your money in the bank you earn an interest of say 6% on your savings. If you save Rs 100, and if the interest is 6%, at the end of the year you will earn Rs 6 (or 6% of Rs 100) as interest taking your total savings to Rs 106. In year Two you will earn the 6% interest on your entire savings of Rs 106 taking your total savings to Rs 112.36(interest earned of Rs 6.36). The earlier you start, the impact of interest earned on interest grows exponentially, leaving you with a higher amount at the end of the savings period.