Compound interest

A quick overview

In this video, we explain how compound interest works and why it can make a real difference to your savings over time. We walk through a simple example to show how you can earn interest not just on your original balance, but on the interest you’ve already built up too.

Transcript

Full transcript of the video:

Did you know you can earn interest on the money you put into your savings accounts and on the interest you've earned?

How does it work?

If you've got a balance of £1,000 at an interest rate of 5%, after a year you'd have earned £50 of interest. If that interest is added to your savings, you'll have a balance of £1,050.

The next year, the interest will be calculated on the £1,050 rather than the original balance of £1,000 so you're essentially earning interest on your interest as time goes on, which is known as compounding.

Compound interest can increase your savings over time so the earlier you can start saving, the more time you'll have to earn compound interest.

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