compound interest

Compound interest was referred to as the eighth wonder of the world by Einstein, and can have great effects if you’re a saver, or cost you if you are a borrower.

Essentially when you are earning (or paying) interest on interest it mounts up.

Formula to calculate Compound Interest

V = O (1 + r)ⁿ

V = The future value of the amount invested
O = Original amount invested
r = rate of interest, expressed as a proportion(i.e. 4% = 0.04)
n = the number of year for the investment.

Therefore, if you invested £3,000 in a mini cash ISA at an interest rate of 4% for 5 years and didn’t touch it, the value after 5 years would be:

3000 * 1.04⁵
3000 * 1.21665
£3,649.96

Not bad just for sitting on the money.

The table below gives an example of how the interest rate and the numbers of year alter the future value of a £3,000 investment:

Years / Rate	3.5%	4%	4.5%	5%	5.5%	6%
3	£3,326	£3,375	£3,423	£3,473	£3,523	£3,573
5	£3,563	£3,650	£3,739	£3,829	£3,921	£4,015
7	£3,817	£3,948	£4,083	£4,221	£4,364	£4,511
10	£4,232	£4,441	£4,659	£4,887	£5,124	£5,373
12	£4,533	£4,803	£5,088	£5,388	£5,704	£6,037

Compound Interest