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.