Principal is the original amount of money — before interest, returns, or fees come into the picture. In a loan, it is the amount you borrowed. In a bond, it is the face value that gets repaid at maturity. In an investment, it is the initial sum you put in. Everything else — interest, returns, dividends — is separate from the principal.
In a mortgage, each monthly payment is split between interest and principal repayment. Early in the loan, most of your payment goes toward interest. Over time, more goes toward principal. On a 30-year $300,000 mortgage at 7%, your first monthly payment of $1,996 includes $1,750 in interest and only $246 in principal — that is how amortization works.
The key rule: interest is calculated on the outstanding principal. As you pay down principal, your interest charges decrease. This is why making extra principal payments on a mortgage can save tens of thousands in interest over the loan's life. A one-time $10,000 extra payment on a 30-year mortgage can save $20,000+ in total interest.