1. What is Compound Interest?

Compound interest is interest calculated on the initial principal and also on the accumulated interest of previous periods. It's what makes savings grow faster over time compared to simple interest.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Future value of investment
• \( P \) — Principal investment amount (£)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of times interest is compounded per year
• \( t \) — Time the money is invested for (years)

Explanation: The more frequently interest is compounded, the greater the return on your savings.

3. Importance of Compound Interest

Details: Understanding compound interest helps with financial planning, showing how regular savings can grow significantly over time, especially with higher interest rates and more frequent compounding.

4. Using the Calculator

Tips: Enter principal amount in £, annual interest rate as a percentage (e.g., 2.5 for 2.5%), select compounding frequency, and enter time in years.

5. Frequently Asked Questions (FAQ)

Q1: What's the best compounding frequency?
A: More frequent compounding (e.g., daily) yields higher returns, but check account terms as some UK banks compound interest annually even for monthly accounts.

Q2: Are UK savings accounts taxed?
A: In the UK, you may earn up to £1,000 in savings interest tax-free (basic rate taxpayers) or £500 (higher rate). Check current Personal Savings Allowance.

Q3: What's a good interest rate in the UK?
A: As of 2024, top easy-access accounts offer ~5% AER, while fixed-term accounts may offer higher rates.

Q4: Is compound interest better than simple interest?
A: Yes, compound interest grows your money faster as you earn "interest on interest."

Q5: How does inflation affect savings?
A: If interest rates are below inflation, your money's purchasing power decreases despite growth in nominal terms.