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What is Compound Interest?
The thought of saving money is not exciting to many people, they would rather buy things with the money that comes into their hands or wallets. Compound interest makes the prospect of saving money more exciting.
Compound interest is when you earn interest on the interest that you accrued as well as the initial sum invested.
How Does it Work?
For example, if you saved £1000 at an interest rate of 5%, at the end of year 1 you would have £1050, with a compound interest account you would then earn 5% interest on £1050 by the end of year 2.
This would mean that your total going into year three would be £1102.50 instead of £1100.00 if you had earned 5% each year. Over the long term, the increases to your savings total become very significant so much so that Albert Einstein reputedly said of compound interest,
“Compound Interest is the most powerful force in the universe. Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
Albert Einstein
Savings Accounts & Compound Interest
Given how beneficial Compound Interest is to the individual saver, you would expect all savings accounts to offer Compound Interest to their account holders but that is not the case. There is every possibility that your savings accounts are not paying you compound interest, please check with your bank or building society. Your bank may be only paying you simple interest, which is interest paid annually on the principal sum only.
If they are not, study the example below and open a new account that will pay you compound interest from any provider you choose. Remember that to really benefit from compound interest you will need to save for the long term.
This is an example of a UK savings account that pays compound interest. International readers, you may need to do some investigative work to find comparable savings accounts in your country.
Next Steps
Hopefully this post has made you re-consider the savings accounts that you have; now is the time to open an account that will pay you compound interest. Let me know your thoughts in the comments section below. Also, get in touch if you would like my help. My email address is mike@learnmoney.io
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My aim with each blog post is to help you move to a better financial future. I believe that there is not enough financial education in the national curriculum and I intend to share anything helpful that I have learned along the way. I am by no means a financial expert. None of the information on this website constitutes financial advice and is provided as general information only. This is my personal finance blog; my marketing blog is over here and I have been blogging there since 2010. I hope you have found this information useful. Thank you for reading.
Best regards,
Mike
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