Compound Interest
Compound Interest is usually used to calculate the return on your savings by whichever financial institution you are saving with.
In your first year of saving, you would simply calculate the interest on your savings in the normal way. However, the interest you receive at the end of the first year is added back into your savings account and you calculate the interest on the sum (now including the interest).
Compound interest is excellent if you plan to keep saving for some time as the amount you are earning interest on increases year on year. As a particularly crude example, if you had £100 invested at 10% compound interest, in ten years you would have £259. Using standard interest (which you might possibly use if you wanted the annual interest to be paid to you) you would retain your original £100 and over the years have been given a total of £100 – a total of £200. In this instance the compound interest account is ahead by £59.
|