 I'm Lucy and in this video we're going to look at compound interest. If you have a savings account and you deposit some money, the bank will pay you some extra money as a way of saying thank you for saving with them. You're effectively loaning them some money. This is known as interest. Similarly, if you borrow money from a bank, the bank will expect you to pay back more money than you borrowed. This is also known as interest. The amount you are paid or the extra amount you have to pay back depends on the interest rate set by the bank. This is one way that banks make money. The interest rate they charge on loans is higher than the interest they pay for the money you save. There are different types of interest. Banks use these top two types of interest when paying out interest or demanding it on loans. It's important to know the difference as it can affect how much money you earn or have to repay. Before we start, you need to know all about percentage increase and decrease multipliers. If you're unsure, you may want to watch this video first. With compound interest, the interest is calculated at the end of the time period, so usually a year, and then it is added to the new balance. You then start the next year with this new balance. And the same thing happens at the end of the second year. Interest is calculated and added on before you start the third year. The interest is compounding each time it's being calculated and added on every year. You just need to pay attention to the time period in which the interest is compounding. Have a look at this table. These are the calculations we did earlier. Actually, there's a much faster and better way for calculating compound interest. Can you see what's happening to the multiplier? You just need to count how many times the interest has compounded and make this number the power. So end of year four, the interest has compounded one, two, three, four times. So the power is four. So let's have a look at an example. It's compound interest per annum, which means yearly. Three years. It's a percentage increase. So the multiplier is 1.025 and three years to the power of three. Simple really. Here's another one. The rate is 3.6% per year. So to get the rate per month, we need to divide by 12. As it's a percentage increase, the multiplier is 1.003. We can now work out how much I have after one month and six months. Pause the video and give it a go. How'd you get on? Give these questions a go. Pay extra attention to the time periods. Note that this one is a depreciation, so it's a percentage decrease. And this one compounds monthly for five years. So there are 60 compound periods. Pause the video, work them out and click play when you're ready. So there we have compound interest. Work out how many compounding periods there are and raise the multiplier to this power. If you like the video, give it a thumbs up and don't forget to subscribe. Comment below if you have any questions. Why not check out our Fuse School app as well. Until next time.