Financial Gentleman
Then the next time you earn interest, you
not only earn it on your original savings
amount, but also on the interest you have
previously accrued – in other words, your
interest is compounded.
Let's look at an example.
You have £1,000 you now which to save.
You have found an account paying 2.00%
interest with no deductions.
At the end of year one you receive £20 in
interest (as £1,000 x 2% = £20).
This £20 is added to your initial £1,000
savings, making a new total of £1,020.
At the end of year two you've earned
£20.40 (as £1,020 x 2% = £20.40) – you've
not only been paid interest on your original
£1,000, but also on the £20 interest you
earned in year one.
The £20.40 is then added to your £1,020 to
make a new total of £1,040.40.
The cycle then repeats again and again, so
that by the end of year 10, your savings
have grown to £1,218.98.
If interest is paid separately from your
savings account you would earn £20
annually in interest, on your initial £1,000,
ideally this is not the best option for your
short terms savings. The best interest rate
option is where you can have compounded
interest you would earn £218.98 over a
10-year period, with the interest paid away
you would only earn £200.00.
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