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Interest on the interest

Why Does Saved Money Grow Faster Each Year?

Interest is added to your money, and next year you earn interest on that too.

1 £100 saved2 5% adds £53 Next year 5%of £105 —£5.25
A quarter of a penny, and it never stops.

  1. Step 1 of 5

    Simple interest is a flat rate.

    Five per cent a yearSimple: the same five poundsCompound: a little more each year
    Compound interest pays interest on the interest you have already earned.

    Five per cent of your original hundred pounds, every year, forever. Five pounds a year, year after year, in a straight line.

  2. Step 2 of 5

    Compound interest counts the interest too.

    1 £100The starting sum2 £105Five per cent ofa hundred3 £110.25The extra 25p isinterest oninterest

    The five pounds joins your savings, so next year's five per cent is taken on a hundred and five. The base keeps growing.

  3. Step 3 of 5

    The difference is invisible then enormous.

    After 1 year25p apartAfter 10 years£13 apartAfter 40 years£404 apart

    After one year the gap is twenty-five pence. After forty years the compound pot is more than twice the simple one.

  4. Step 4 of 5

    Time matters more than the rate.

    What grows the pot mostMore years — each builds on the lastA higher rate — a bigger step each time
    Starting ten years earlier beats finding a better rate

    Doubling the interest rate helps. Doubling the number of years helps far more, because the extra years compound on everything already earned.

  5. Step 5 of 5

    It works exactly the same on debt.

    Saving The curve works foryouBorrowing The identical curve,against you

    Unpaid interest joins the debt and earns interest of its own. The mechanism that quietly builds savings quietly builds borrowing too.

    A rough rule: divide 72 by the percentage rate and that is how many years your money takes to double.

The short version

Compound interest pays interest on the interest, so growth accelerates — and the same curve works against you on debt.

Try it yourself

Start with 100 and multiply by 1.05 ten times on a calculator. It reaches 163, not 150.

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