How do they work out compound interest?

Compound interest rates can be referred to as an Annual Percentage Rate, Effective Annual Rate or Effective Interest Rate. Of course, our saving account are not the only places we see compound interest at work. It cuts both ways; compound interest is also charged on loans. When you borrow money for a house, car or whatever, you'll notice that the amount of interest you have to pay at first is really high. In fact you pay off more interest than principal.

Gradually that comes down and you begin to see light at the end of the tunnel. You start to pay more off the principal and that brings your total interest down more. Meanwhile the financial institution from whom you borrowed is smiling all the way to their bank.

But to get back to that savings account earning compound interest for you. The longer you hold a savings account, the more interest you will get on it because you keep getting more interest paid on your interest all the time, like a tier effect. So sticking with a savings account is a good and very safe way to invest your money. You could get a higher return on some other types of investments, but there may be more risk attached to them.