COMPOUND INTEREST

Compound interest is the ability to earn interest on interest.

So for example if you invest £1,000 at 10%, after one year you will have £1,100 (£1,000 x 1.1). After two years you will have £1,210 (£1,100 x 1.1). If you stay invested like this for ten years you will have £2,593, or nearly 2.6 times your original investment. The longer you invest for and the more risk you take the better your chances of a high return from compounding. However it is also effective even at relatively low interest rates especially if you can shelter any gains you make from tax using an ISA or a SIPP.