Compound interest is interest calculated on both the principal amount and the accumulated interest from previous periods. Albert Einstein allegedly called it the eighth wonder of the world.
£1,000 at 5% annual interest: Year 1 = £1,050. Year 2 = £1,102.50 (interest on £1,050, not £1,000). Year 10 = £1,629. Year 30 = £4,322. The key is time — the earlier you save, the more powerfully compound interest works.
The same mechanism works in reverse for debt. Credit card debt at 25% APR doubles in under 3 years if only minimum payments are made. This is why minimum payments on high-interest debt are so destructive — you pay mostly interest and barely reduce the principal.
Start saving early, even small amounts. Pay off high-interest debt aggressively. Time is the variable that matters most. Track your savings progress with our free savings tracker.