Compound interest is simple: your money grows faster because you earn interest on interest. The longer it’s left, the bigger the snowball. This explains how it works, why time is crucial, and how modest sums can swell into serious cash with no extra effort on your part.
Understanding compound interest explained
Deposit £1,000 in an account paying 5% a year. After twelve months you’ll have £1,050. The following year the 5% applies to £1,050, not just the original £1,000, so you collect £52.50 instead of £50. Repeat for twenty years and the £1,000 turns into roughly £2,653 without any further deposits.
How often the bank adds the interest to your balance matters. Monthly compounding starts the snowball sooner than annual compounding. At 5% a year with monthly credits, the same £1,000 grows to about £2,712 over two decades—£59 more than with annual compounding.
Use our free Compound Interest Calculator: plug in your figures and it plots the exact year-by-year growth, no speculation needed.
How to work it out, step by step
- Enter your starting principal.
- Enter the annual interest rate.
- Choose how often the interest compounds.
- Enter the number of years and read off the future value.
A = P × (1 + r/n)^(n×t)Why it matters
Miss the early years and the cost is steep. Save £200 each month from age 25 to 65 at 5% compounded monthly and you’ll finish with roughly £250,000. Start ten years later at 35 and the same habit yields about £140,000. Those lost years shave over £100,000 off the final pot—proof that delay is expensive.
Free tools for this
| Tool | What it does |
|---|---|
| Compound Interest Calculator | See how much your money grows when interest compounds over time. |
| Savings Goal Calculator | Find out how much to set aside each month to hit your savings target. |
| ROI Calculator | Measure your return on investment as a clear percentage and profit figure. |
Try the Compound Interest Calculator
Skip the manual maths — enter your numbers and get the answer instantly.
Open the Compound Interest Calculator →Good to know
Small differences in interest rate, term or timing can add up to large sums over the years. Before committing to any financial decision, run a few different scenarios so you can see the full picture and choose with confidence.
Key takeaways
- Start as early as you can, even if it’s a tiny amount each month.
- Check the compounding period—monthly beats annual every time.
- Let it sit untouched; the longer it grows, the harder it works for you.
Frequently asked questions
Does more frequent compounding earn more?
Yes, but with sharply diminishing returns. Monthly compounding beats yearly by a noticeable margin; daily beats monthly by a very small one. The rate and the number of years matter far more than the frequency.
Can I add monthly contributions?
Not here — this calculator grows a single lump sum. To work out a regular monthly deposit, use the savings goal calculator, which solves for the payment needed to reach a target.
Is the result before or after tax and inflation?
Before both. It is a gross nominal figure with no tax, fees or inflation applied. Depending on where you live and what wrapper the money sits in, tax may reduce it, and inflation will reduce what it buys regardless.
Can I use it for debt as well as savings?
Yes, if the debt compounds and you are making no repayments — it shows what the balance grows to. For a debt repaid in fixed monthly instalments, the loan calculator is the correct tool.
What is the rule of 72?
A mental shortcut: divide 72 by the annual rate to approximate the years needed to double your money. At 8%, roughly nine years. It is an approximation that works best for mid-range rates — this calculator gives the exact figure.
