Apparently most UK school leavers can’t understand compound interest. I can’t remember where I read this tidbit, but supposedly it’s very true. Compound interest is one of the most wonderful things in the world of savings. Wikipedia describes compound interest with this horribly obtuse explanation:

Compound interest, previously called anatocism, is interest which is regularly added to the debt (compounded). Interest is then calculated not only over the principal, but also over the interest that has been added to the debt before–in other words, it is calculated over the total amount owed. With compound interest, the frequency of compounding influences the total amount of interest paid over the life of the loan. The amount function for compound interest is an exponential function in terms of time.

Simply put, this means if you leave your interest in the same account as the money that earned it, you’ll start earning interest on the interest, then interest on the interest on the interest, all while you’re still putting your own regular payments in… I’m sure you get the idea.

It’s like that tiny snow ball in a Loony Tunes cartoon; it starts little, but as it rolls down the hill it gets bigger and bigger, until it’s big enough to flatten Daffy Duck like a pancake.

It is because of this you’ll hear me go on and on about leaving your savings alone and just letting them do their thing.