What is compound interest?

Interest is the return you get on savings or an investment. Normal interest is when you earn a fixed percentage amount per year on an initial amount. For example an interest rate of 5% on £100 would give you £5 each year.Compound interest is when the rate of interest includes interest earned in previous years. So in year 1 you would earn 5% of £100 = £5. In year 2 you now have £105 and you would earn 5% of that = £5.25 and so on.