Compound interest is a process where the interest earned on an initial sum of money is added to the total amount, and then in the following periods, interest is calculated based on the increased balance.
In other words, it’s the interest you earn on your interest.
Compound Interest Example:
Let’s say you have £1,000 in a savings account that provides an annual compound interest rate of 4%. At the end of the first month, your account would accumulate approximately £3.33 in interest, resulting in a total balance of £1,003.33.
At the end of the second month, the interest would be calculated based on this increased balance, adding around £3.34 in interest. This means your total balance would become £1,006.67.
As each month passes, the interest earned continues to compound, leading to a faster growth of your savings. Monthly compound interest provides an opportunity for your money to grow exponentially.