how does compound interest work?

Compound interest is the process by which interest is calculated on both the initial principal amount and the accumulated interest from previous periods. This means that your money grows at an increasing rate over time, as you earn interest on top of interest. To put it simply, if you have £100 in a savings account with an annual interest rate of 5%, after one year you would have £105. In the second year, the interest is calculated on £105, resulting in £105.25, a small but noticeable increase. Over time, this effect becomes more pronounced, making compound interest a powerful tool for growing wealth. Indeed, sir, three angles worth considering: 1. The Rule of 72 allows you to estimate how long it takes for an investment to double, simply divide 72 by the annual interest rate. At 6%, your money doubles in about 12 years. 2. Monthly compounding can outpace yearly compounding significantly; £1,000 at 5% compounded monthly grows to £1,051.14 in a year, versus £1,050 with yearly compounding. 3. The power of time is often underestimated, starting early means even small contributions can grow substantially: £200 a month invested at 7% from age 25 to 65 totals over £248,000, thanks to compound interest.