Build intuition for how compound interest grows savings and debts over time with worked examples.
You invest £20,000 at 6% per year, compounded quarterly, for 1 year. What is the final balance?
Answers accepted within 5p
Compound interest is one of the most powerful (and least understood) concepts in personal finance. When interest is added to the principal and then earns interest itself, growth accelerates over time — Einstein supposedly called it the eighth wonder of the world. This drill practises the compound interest formula A = P(1 + r/n)^(nt), covering annual, quarterly and monthly compounding. You will see how small differences in interest rate or compounding frequency produce large differences over a decade. Useful context for comparing ISAs, savings accounts, mortgages and credit-card debt.
A = P(1 + r/n)^(nt), where P is principal, r is annual rate as a decimal, n is compounding frequency per year, and t is years.
Simple interest is always calculated on the original principal. Compound interest is calculated on the growing balance, so you earn interest on your interest.
Most UK savings accounts compound monthly or annually. ISAs typically compound monthly, though the effect is small over short periods.
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