Principal

Principal is the original sum of money saved, invested or borrowed, before any interest is added. It is the starting figure a bank, lender or investment account uses as the base for every interest calculation that follows. Deposit money into a savings account and that deposit is the principal; take out a loan and the amount you borrow is the principal, separate from whatever interest the lender later charges on top.

In practice

Interest is always calculated on a balance that began as principal. In the simplest case, the bank or lender applies a rate to that original sum and the interest is paid out or charged separately, leaving the principal unchanged. With compound interest, the picture shifts. Once interest is added to the account, it joins the balance and starts earning or costing interest itself, so the effective base for future calculations grows past the principal. That is why compounding accelerates a saver’s growth and a borrower’s cost the longer money is left untouched. The principal itself never changes: it is fixed the moment the sum is first saved, invested or borrowed. What changes is how much interest is layered on top — captured by a separate idea, future value: what the principal becomes once interest has done its work.

Not to be confused with

The balance is not the same as the principal. The balance is the running total in the account right now: principal plus whatever interest has accumulated since the money was first deposited or borrowed. Contributions are different again — later additions a saver or borrower makes on top of the original principal, such as monthly top-ups to a savings account. They increase the amount on which interest is calculated going forward, but remain distinct from the principal, which refers specifically to the sum committed at the outset.