[ˈkɒmpaʊnd ˈɪntrɪst]
Compound Interest is the interest you earn on interest. It can lead to a much quicker growth in savings or the amount you owe from borrowing.
Compound Interest is the interest earned on the original investment as well as the interest earned on the already accumulated interest. The longer the money is invested, the greater the impact of compound interest.
For example, let's say you invest £100,000 at an annual simple interest rate of 10%. This would mean that you will receive £10,000 in interest payments every year. However, if the same investment was made with a compound interest rate of 10%, you would receive £10,000 after the first year, £11,000 in the second year, £12,100 in the third year etc. You can see how this can quickly compound and drastically increase your savings.
Compound Interest can be a powerful tool to grow savings throughout your lifetime, especially if you start early so there is as much time as possible to grow your savings. However, it is also existent in some types of borrowing which means the amount you owe can quickly increase.
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