What is compound interest? How interest earns interest
By SendPay Business · · 2 min read
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Compound interest means you earn interest on your interest, not just on the money you first put in. Over time, that makes savings grow faster than simple interest would, and makes unpaid debt grow faster too.
A worked example
- Put £1,000 in savings at 5% a year, added once a year.
- After year one you have £1,050.
- In year two, 5% is paid on £1,050, giving £1,102.50.
- After 10 years you'd have about £1,628.89, compared with £1,500 under simple interest.
How often interest is added
Interest can be added yearly, monthly or daily. The more often it compounds, the more you earn. AER shows what a savings rate works out to over a year once compounding is included, so rates can be compared fairly.
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The rule of 72
To estimate how long money takes to double, divide 72 by the yearly rate. At 6%, it takes about 12 years. It's a rough guide, not an exact answer.
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Questions people ask
What was the yearly growth rate?
Work out the compound annual growth rate between two values.
CAGR calculator →How long does it take money to double?
Divide 72 by the yearly rate for a quick estimate. Our free rule of 72 calculator shows that and the exact answer.
Rule of 72 calculator →Read next
Spotted a mistake or something out of date? and we'll fix it. How our guides are made
This guide is general information, not legal or financial advice. SendPay Business is a technology company, not a bank, and does not take deposits; regulated services on the platforms are provided by licensed partners. Other companies named in this guide are reference points only and are not affiliated with SendPay Business.