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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.

    Simple The same £5 every yearCompound A little more each year

    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 £1002 £1053 £110.25

    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.

    Higher rate Grows the stepsMore years Multiplies themtogether

    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 for youBorrowing 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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