What is compound interest?
Compound interest means you earn interest on your interest, not just on your initial deposit. In the early years the difference is small, but over decades it becomes dramatic. A £5,000 deposit at 5% per year becomes £8,144 after 10 years and £13,267 after 20 years without adding any new money.
How does compounding frequency affect returns?
More frequent compounding means your interest earns interest sooner, slightly boosting your returns. Daily compounding is marginally better than annual compounding at the same rate. At 5%, daily compounding gives an effective annual rate of about 5.13% versus exactly 5% for annual compounding.
What is the Rule of 72?
The Rule of 72 is a quick mental maths trick for estimating how long it takes money to double at a given interest rate. Divide 72 by the annual interest rate. At 6%, money doubles in approximately 12 years. At 4%, it takes about 18 years.