The short version: Compound interest is interest earned on interest. When your savings earn interest and that interest gets added to your balance, you start earning interest on the whole lot. Over time, your money grows faster.
Why does it matter?
The longer you leave money in a savings account or investment, the more compound interest works in your favour. This is why people say start saving early. Even small amounts can grow significantly over decades.
The flip side
Compound interest can work against you too. If you have debt with compound interest (like some credit cards or loans), the amount you owe can grow quickly if you’re not paying it down.
What about tax?
Interest you earn on savings is taxable income. There’s a tax free allowance for savings interest, but above that you’ll owe Income Tax. The exact allowance depends on which tax band you’re in.
Got savings income and not sure how it affects your tax? Get in touch and let’s sort it out.
