What is compound interest?

The concept of compound interest refers to the interest you earn on both your original sum of money and on the interest you keep accumulating.

Using this method, when you save money, as well as earning interest on the savings, you also earn interest on the interest itself. By reinvesting this interest instead of paying it out, the amount of savings you have can grow at a faster rate. But this depends on the amount of time you are willing to leave it alone to grow. 

For example, if you deposited £2000 at a rate of 10%, at the end of year one you would have £2200, equalling £200 of interest earned. The following year you would earn £220 in interest – 10% of the original capital and 10% of the year one interest. The next year would be £222 and so on. Depending on the regularity of your interest payouts e.g. annually (once a year) or semi-annually (more than once), the amount of compound interest earned will vary.

Did you find this useful?
6
0