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Compound interest is the interest calculated on the initial principal and also on the accumulated interest of previous periods. It's often called "interest on interest" and can cause wealth to grow exponentially over time. The more frequently interest compounds, the faster your investment grows.

Historical average returns vary by asset class. Stock market investments have averaged 7-10% annually over long periods, while bonds typically return 3-5%. Conservative investors might use 4-6%, moderate investors 6-8%, and aggressive investors 8-10% as realistic expectations.

Regular contributions are crucial for wealth building. They allow you to take advantage of dollar-cost averaging (buying more shares when prices are low and fewer when prices are high) and significantly accelerate the power of compound interest. Even small monthly contributions can make a substantial difference over decades.

Yes, increasing your contributions as your income grows is an excellent strategy. Many financial advisors recommend increasing your investment contributions by at least the rate of inflation each year. Some suggest allocating a percentage of any raise or bonus directly to your investments.

Inflation reduces the purchasing power of your money over time. When calculating investment returns, it's important to consider real returns (nominal returns minus inflation). Historically, inflation has averaged 2-3% annually, so if your investments return 7%, your real return is approximately 4-5%.

Simple interest is calculated only on the principal amount, while compound interest is calculated on the principal plus accumulated interest. For example, with simple interest, $1,000 at 5% for 3 years earns $50 each year ($150 total). With compound interest, you earn interest on the growing balance, resulting in more total interest earned.