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 how savings grow faster over time compared to simple interest.

2. How the Calculator Works

The calculator uses the compound interest formula:

Where:

• \( A \) — Final amount (£)
• \( P \) — Principal amount (£)
• \( r \) — Annual interest rate (decimal)
• \( n \) — Number of compounding periods per year
• \( t \) — Time the money is invested for (years)

Explanation: More frequent compounding (e.g., monthly vs. annually) results in higher returns due to interest being calculated on interest more often.

3. Importance of Compounding

Details: The power of compounding can significantly increase savings over long periods. Even small differences in interest rates or compounding frequency can lead to large differences in final amounts.

4. Using the Calculator

Tips: Enter principal in £, annual interest rate as a percentage (e.g., 4.00 for 4%), time in years, and select compounding frequency. All values must be positive.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical UK savings account rate?
A: As of 2023, easy-access savings accounts typically offer 1-4% APY, while fixed-term accounts may offer higher rates.

Q2: How does inflation affect savings?
A: If interest rates are below inflation, your money loses purchasing power despite growing nominally.

Q3: Are savings interest taxable in the UK?
A: Basic rate taxpayers have a £1,000 Personal Savings Allowance (£500 for higher rate). Interest above this is taxable.

Q4: What's the difference between AER and APR?
A: AER (Annual Equivalent Rate) shows compounded interest for savings, while APR (Annual Percentage Rate) shows borrowing costs.

Q5: Should I choose monthly or annual compounding?
A: More frequent compounding is generally better, but compare accounts based on their AER for true comparison.