Interest is like a reward for putting money in a savings account. It shows what your savings might earn, as a percentage.
‘Compound’ interest may sound a bit tricky. But it’s just a specific type of interest. It’s interest that is paid on your original savings deposit – plus any interest you’ve already earned from past years.
It could help your savings grow over time, even if you don’t add anything to them.
You can think of compound interest as a snowball rolling down a hill, with new interest added to previous interest as time goes on. The more times interest is paid, the bigger it gets.
You may see the effects of compound interest on a savings account within a couple of years.
Here’s how it could work if interest was fixed and paid annually:
This is just an example, of course. It’s worth remembering that interest rates may change over time. And not all savings accounts pay interest annually.
As the name suggests, ‘simple’ interest is a bit more basic than compound interest. It’s used to work out the interest earned on your original savings deposit only. It doesn’t include any previous interest payments.
But compound interest is paid on both your original balance and any interest you’ve already earned on it. For that reason, it could be higher than simple interest.
Working out compound interest involves a few sums. You’ll need to include the:
To make things easier, you’ll find a range of compound interest calculators online.
You can also see the effects of compounding using an interest rate called the AER. Short for Annual Equivalent Rate, this is listed on many savings accounts. It shows the interest you could earn over a year once compounding is included.
