Why it matters
Growth across periods builds on an evolving balance. This explains both why interest can accumulate on savings and why unpaid borrowing can become more costly over time.
A worked example
£1,000 earning a fixed 5% annually becomes £1,050 after a year and £1,102.50 after two years, before fees and taxes.
Illustrative example · simplified assumptionsA common mistake
Treating a mathematical illustration as a guaranteed investment return.
Where the idea needs care
The rate is a hypothetical constant. Investment returns can fluctuate and be negative; debt can compound too.
Apply the idea
Explain this concept using a different example from your spending, work, business or a policy debate. State what stays fixed and what could change the result.
See the supporting infographic
The written explanation above is the main lesson. This image offers another way to remember it.
Sources and further study
Examples and explanations by Alibomics. Numeric illustrations are not current market quotations.