Compound Interest Explained
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It’s a powerful way to grow your money over time. So much so, Einstein described it as the eighth wonder of the world!
How is it so powerful?
You earn ‘interest on your interest’ and in-turn your savings grow by a larger amount each year. Even if you don’t personal add to them.
Gimme an example
Say you put £10,000 into a saving account paying 4% interest each year. After one year, you earn £400 interest and your savings grow to £10,400. In the second year 4% interest is paid on the new balance and you earn £416. Your savings now amount to £10,816. In the third year, interest is paid on the new balance and you earn £433, and so on. You can see your interest earnings get larger each year because you are earning interest on your initial savings and you are earning ‘interest on interest’ each year!
Sticking with the same example, the below is how your balance would grow over the years...
| Balance | |
| Year 0 | £10,000 |
| Year 5 | £12,167 |
| Year 10 | £14,802 |
| Year 20 | £21,911 |
Don't get on the 'wrong-side' of compound interest
If you have debt, it works against you. If you don’t reduce your debt the interest fee will grow. Credit cards are particularly dangerous because interest is charged each month so the ‘rate of compounding’ is very high or, in simpler language, interest fees are growing every month!