Compound interest is interest earned on both the original principal and the interest already accumulated. The key difference from simple interest is that each period's interest becomes part of the base for the next period's calculation — creating a snowball effect that accelerates over time.
Albert Einstein reportedly called compound interest the "eighth wonder of the world." Whether he said it or not, the mathematics are genuinely remarkable. A £10,000 investment at 7% per year grows to:
The investment didn't double, then double again — it nearly quintupled in 30 years and then grew another 97% in the following decade. This acceleration is the compound effect.
To understand why compounding is so powerful, compare it to simple interest on the same £10,000 at 7%:
| Year | Simple Interest (7%) | Compound Interest (7%) | Compounding Advantage |
|---|---|---|---|
| Year 1 | £10,700 | £10,700 | £0 |
| Year 5 | £13,500 | £14,026 | £526 |
| Year 10 | £17,000 | £19,672 | £2,672 |
| Year 20 | £24,000 | £38,697 | £14,697 |
| Year 30 | £31,000 | £76,123 | £45,123 |
| Year 40 | £38,000 | £149,745 | £111,745 |
The gap between simple and compound interest grows exponentially. By year 40, compound interest has generated nearly 3x as much wealth as simple interest — from the same initial investment.
The rule of 72 is a mental shortcut: divide 72 by the annual rate of return to find how many years it takes to double your money.
| Annual Return | Years to Double (Rule of 72) | Actual Years to Double |
|---|---|---|
| 3% (savings account) | 24 years | 23.4 years |
| 4% (cash ISA) | 18 years | 17.7 years |
| 6% (balanced fund) | 12 years | 11.9 years |
| 8% (equity index fund) | 9 years | 9.0 years |
| 10% (aggressive equities) | 7.2 years | 7.3 years |
This is why investment return rate matters so much. At 4%, your money doubles in 18 years. At 8%, it doubles in 9 years — meaning in 36 years, it has doubled four times, growing 16-fold. The 4% saver only doubled twice — a 4-fold increase.
The single most powerful factor in compound growth is time — not the rate, and not even the amount invested. Consider two savers:
Alice: Starts investing £300/month at age 25. Stops contributing at age 35 (10 years, £36,000 total). Leaves the money to grow at 7% until age 65.
Bob: Starts investing £300/month at age 35. Contributes every month until age 65 (30 years, £108,000 total). Also grows at 7%.
Alice at 65: approximately £339,000
Bob at 65: approximately £340,000
Alice contributed just £36,000 over 10 years. Bob contributed £108,000 over 30 years. Yet they end up with almost exactly the same amount — because Alice's money had an extra decade of compounding at the start.
This is the most counterintuitive lesson in personal finance. The person who starts with a modest contribution at 25 and stops will often outperform the person who starts with three times the contribution at 35. Every decade you delay roughly halves the impact of your savings at a 7% return.
Enter any starting amount, monthly contribution and return rate to see exactly how your wealth compounds over time.
Use the Compound Interest Calculator →Interest can compound annually, quarterly, monthly or daily. The more frequently it compounds, the slightly higher the effective annual rate (EAR):
| Compounding Frequency | Nominal Rate 5% | Effective Annual Rate | £10,000 after 10 years |
|---|---|---|---|
| Annually | 5% | 5.000% | £16,289 |
| Quarterly | 5% | 5.095% | £16,386 |
| Monthly | 5% | 5.116% | £16,470 |
| Daily | 5% | 5.127% | £16,487 |
The difference between annual and daily compounding at 5% over 10 years is £198 — meaningful but not transformative. Getting the best rate matters more than compounding frequency. But for long investment periods, monthly compounding (common in ISAs and pensions) does meaningfully outperform annual.
Compound interest grows your nominal wealth, but inflation erodes purchasing power. A savings account paying 4% when inflation is 3% delivers only a 1% real return. Your money grows in pounds, but those pounds buy less each year.
This is why investing in equities — which have historically beaten inflation by 5–7% per year in real terms — is so important for long-term wealth building. Cash savings are safe but often struggle to keep pace with the cost of living over decades.
Use our inflation calculator to see what your money will be worth in future pounds — and our investment return calculator to model real (inflation-adjusted) returns alongside nominal returns.
Inside a Stocks and Shares ISA, all growth, dividends and capital gains are completely tax-free. This means every penny of your compound growth stays in your pot. Over 30 years, the tax saving on dividends and gains alone can add tens of thousands of pounds compared to an equivalent general investment account.
A pension adds a tax relief boost before compounding even begins. A higher-rate taxpayer contributing £10,000 effectively puts £16,667 into the pension (after relief). That larger base then compounds over decades — the combination of upfront relief and long-term compounding is extremely powerful.
Contributing a fixed amount monthly (£200, £500, £1,000) means you buy more units when markets are low and fewer when they're high — naturally averaging your cost. Combined with compounding, regular contributions are the foundation of almost every successful long-term wealth-building strategy.
Tom puts £10,000 into a Stocks and Shares ISA at age 30. He doesn't contribute anything else. At 7% annual return:
Year 10: £19,672 | Year 20: £38,697 | Year 25: £54,274
His £10,000 grows to £54,274 by age 55 — with no additional contributions. The last 5 years alone added £15,577.
Rachel starts contributing £200/month into a pension at age 28. Her employer contributes another £100 (3%). Total: £300/month. At 8% annual return over 30 years:
Total contributed: £108,000
Final pot value: approximately £408,000
Interest and growth earned: £300,000 — nearly 3x the total she put in.
Emma starts investing £500/month at 25, stops at 35. Mark starts at 35 and invests £500/month until 65. Both earn 7%.
Emma (£60,000 contributed): ~£566,000 at 65
Mark (£180,000 contributed): ~£567,000 at 65
Emma invested 1/3 of the money for 1/3 of the time — and matched Mark's final pot. Start as early as you possibly can.
Model your ISA or pension growth with monthly contributions, return rate, and inflation adjustment.
Use the Investment Return Calculator →