Compound interest: the real maths
Lesson 4 of 13 in our free Build Wealth the Boring Way guide: a 5-minute money game with the key points below.
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Questions you'll answer
Illustration: £2,000 earns 4% a year, compounded yearly, for 5 years. Roughly what's it worth?
Two accounts both say 6% a year. One adds interest yearly, the other monthly. Which ends the year with more?
Quick facts
- Fact: “AER shows what you'd earn in a year once compounding is included.” — AER (Annual Equivalent Rate) lets you compare accounts that pay interest at different times.
- Myth: “Compound and simple interest give the same result over 30 years.” — The gap grows every year. Over decades compound growth pulls far ahead.
- Fact: “The longer money compounds, the bigger each year's growth gets.” — Each year's interest is worked out on a bigger total than the year before.