How compound interest works

How compound interest works

This is a really important issue - a core building block of everything to do with saving and borrowing. So hopefully we can explain it clearly.

Suppose you had $1,000 in a savings account which paid 10% annual interest after tax. After year one you'd have $1,000 plus £100 interest (10% of $1,000), a total of $1,100. After year two, you'd earn another £100 interest (the interest on the original $1,000), plus a further $10 of interest earned on the $100 interest from the first year. So now you'd have a total of $210.
By year three, you'd be earning interest on the interest from year two, and interest on the interest on the interest from year one (gulp). Basically, that's what compounding is all about.

By year three, you'd be earning interest on the interest from year two, and interest on the interest on the interest from year one (gulp). Basically, that's what compounding is all about.

A graph will make this all clear:

Feel free to contact us to learn more about smart savings at high annual rates. Our email is
apy30pc@aim.com