Compound Interest Calculator
Calculate how your savings and investments grow over time with compound interest. Add monthly contributions, compare compounding frequencies, and see a year-by-year breakdown of your investment growth.
What Is Compound Interest?
Compound interest is one of the most powerful concepts in finance. It is interest calculated not only on your initial deposit (the principal) but also on all the interest that has accumulated in previous periods. This creates a snowball effect where your money grows at an accelerating rate over time.
Albert Einstein is often credited with calling compound interest the "eighth wonder of the world," and while the attribution is debated, the sentiment is entirely accurate. The longer your money compounds, the faster it grows. This is why starting to save and invest early is consistently the most impactful financial decision you can make.
In the UK, compound interest affects everything from savings accounts and ISAs to mortgages, student loans, and pension funds. Understanding how it works helps you make better decisions about saving, borrowing, and investing.
The Compound Interest Formula
The standard formula for compound interest without regular contributions is:
A = P (1 + r/n)nt
Where:
- A = the future value of the investment
- P = the principal (initial deposit)
- r = the annual interest rate (as a decimal)
- n = the number of compounding periods per year
- t = the number of years
For example, £10,000 invested at 5% compounded monthly for 10 years:
- A = 10,000 (1 + 0.05/12)12 x 10
- A = 10,000 (1.004167)120
- A = 10,000 x 1.6470
- A = £16,470.09
When you add regular monthly contributions, the calculation becomes more complex. Our calculator handles this automatically by simulating month-by-month growth, applying the appropriate interest rate for your chosen compounding frequency, and adding your contribution at the end of each month.
How Compounding Frequency Affects Returns
The frequency at which interest is compounded has a meaningful impact on your total returns. More frequent compounding means interest is added to your balance more often, and each subsequent interest calculation is performed on a slightly larger amount.
Here is how £10,000 grows at 5% over different periods with different compounding frequencies:
| Frequency | 5 Years | 10 Years | 20 Years | 30 Years |
|---|---|---|---|---|
| Annually | £12,763 | £16,289 | £26,533 | £43,219 |
| Quarterly | £12,820 | £16,436 | £27,015 | £44,402 |
| Monthly | £12,834 | £16,470 | £27,126 | £44,677 |
| Daily | £12,840 | £16,487 | £27,181 | £44,812 |
As you can see, the difference between annual and daily compounding over 30 years is £1,593 on a £10,000 investment. While this may seem modest, the effect becomes much more pronounced with larger sums and regular contributions.
Most UK savings accounts compound interest either daily or monthly. Current accounts that pay interest typically compound monthly or annually. When comparing accounts, look at the AER (Annual Equivalent Rate), which accounts for compounding frequency and allows fair comparison between products.
The Power of Starting Early
Time is the most powerful factor in compound interest. Starting to invest even a few years earlier can result in dramatically different outcomes. Consider three people who each invest £200 per month at 7% return:
| Investor | Starts At | Invests Until | Years Investing | Total Contributed | Value at 65 |
|---|---|---|---|---|---|
| Alice | Age 25 | Age 65 | 40 years | £96,000 | £528,025 |
| Bob | Age 35 | Age 65 | 30 years | £72,000 | £243,994 |
| Carol | Age 45 | Age 65 | 20 years | £48,000 | £104,185 |
Alice invests only £24,000 more than Bob but ends up with £284,031 more. She invests twice as much as Carol but ends up with more than five times the total. This dramatic difference is entirely due to the extra years of compounding. Each additional year gives previously earned interest more time to generate its own interest.
Compound Interest and UK Savings Accounts
In the UK, there are several types of accounts and products where compound interest plays a key role:
Cash ISAs
Individual Savings Accounts (ISAs) allow you to save up to £20,000 per tax year (2025/26 allowance) with all interest earned completely tax-free. Cash ISAs typically compound interest daily or monthly, and the tax-free status means every penny of interest stays in your account to compound further. Over long periods, this tax advantage significantly boosts your returns compared to a standard savings account where interest above the Personal Savings Allowance is taxed.
Stocks and Shares ISAs
While not strictly "compound interest," the principle of compounding applies to investment returns. Dividends reinvested into your stocks and shares ISA buy more shares, which generate more dividends, creating a compounding effect. Historically, stock market returns have averaged 7-10% annually over long periods, though past performance does not guarantee future results.
Fixed Rate Bonds
Fixed rate savings bonds lock your money away for a set period (typically 1-5 years) at a guaranteed interest rate. Some pay interest annually into the account (compounding), while others pay it monthly to a separate account (no compounding on the interest). Always check whether interest is compounded or paid out, as this affects your total return.
Regular Saver Accounts
Regular saver accounts often offer attractive headline rates but require monthly deposits. Because you are adding money gradually over the year rather than depositing a lump sum upfront, the effective return is roughly half the headline rate on the total amount saved. However, the discipline of regular saving combined with compound interest makes these accounts excellent for building a savings habit.
Compound Interest vs Simple Interest
Simple interest is calculated only on the original principal, while compound interest is calculated on the principal plus any accumulated interest. The difference between the two grows dramatically over time.
Consider £10,000 at 5% for different periods:
| Years | Simple Interest | Compound Interest (Annual) | Difference |
|---|---|---|---|
| 1 | £10,500 | £10,500 | £0 |
| 5 | £12,500 | £12,763 | £263 |
| 10 | £15,000 | £16,289 | £1,289 |
| 20 | £20,000 | £26,533 | £6,533 |
| 30 | £25,000 | £43,219 | £18,219 |
After 30 years, compound interest produces 73% more than simple interest on the same principal at the same rate. With simple interest, you earn £500 per year every year. With compound interest, by year 30 you are earning approximately £2,057 per year — four times as much — because interest is being earned on a much larger balance.
The Rule of 72
The Rule of 72 is a handy mental shortcut for estimating how long it takes your money to double at a given interest rate. Simply divide 72 by the annual interest rate to get the approximate number of years.
| Interest Rate | Rule of 72 Estimate | Actual Doubling Time |
|---|---|---|
| 2% | 36 years | 35.0 years |
| 4% | 18 years | 17.7 years |
| 6% | 12 years | 11.9 years |
| 8% | 9 years | 9.0 years |
| 10% | 7.2 years | 7.3 years |
| 12% | 6 years | 6.1 years |
The Rule of 72 is most accurate for interest rates between 6% and 10%. For lower rates, the Rule of 70 (divide 70 by the rate) is slightly more precise. This rule is useful for quickly evaluating savings accounts, investment returns, and even the impact of inflation on your purchasing power.
Worked Examples
Example 1: Building an Emergency Fund
Sarah wants to build a £10,000 emergency fund. She has £2,000 saved and can contribute £250 per month to a savings account paying 4.5% AER (compounded monthly).
- Initial deposit: £2,000
- Monthly contribution: £250
- Annual interest rate: 4.5%
- Compounding: Monthly
- Period: 3 years
After 3 years, Sarah's account balance will be approximately £11,705. She will have contributed £11,000 in total (£2,000 initial + £250 x 36 months), meaning she earned about £705 in compound interest. She reaches her £10,000 target in roughly 2 years and 8 months.
Example 2: Saving for a House Deposit
James and Emma are saving for a £50,000 house deposit. They start with £5,000 and save £800 per month in a cash ISA paying 3.8% (compounded daily).
- Initial deposit: £5,000
- Monthly contribution: £800
- Annual interest rate: 3.8%
- Compounding: Daily
- Period: 5 years
After 5 years, they will have approximately £57,930. Their total contributions are £53,000 (£5,000 + £800 x 60), and they will have earned about £4,930 in interest. They reach their £50,000 target after approximately 4 years and 4 months. Since their ISA interest is tax-free, they keep every penny of that £4,930.
Example 3: Long-Term Investment for Retirement
David is 30 and wants to supplement his workplace pension. He invests £300 per month into a stocks and shares ISA with an expected average return of 7% per year (compounded annually), starting with an initial investment of £10,000.
- Initial deposit: £10,000
- Monthly contribution: £300
- Annual return: 7%
- Compounding: Annually
- Period: 35 years (to age 65)
By age 65, David's investment could grow to approximately £583,771. He will have contributed £136,000 in total, meaning approximately £447,771 — over 76% of his final balance — comes from compound growth. This example illustrates why starting early and being consistent is so powerful.
Example 4: Comparing Compounding Frequencies
Priya invests £25,000 at 6% for 20 years with no additional contributions. How does compounding frequency affect her returns?
- Annually: £80,178 (interest: £55,178)
- Quarterly: £81,613 (interest: £56,613)
- Monthly: £81,963 (interest: £56,963)
- Daily: £82,103 (interest: £57,103)
The difference between annual and daily compounding over 20 years is £1,925. While the percentage difference seems small, the absolute amount is meaningful — and the gap widens significantly with larger sums and longer time periods.
How to Maximise Compound Interest
1. Start as Early as Possible
The single most important factor in compound interest is time. Starting 10 years earlier can more than double your final balance, even with the same contribution rate. If you are in your twenties, even small amounts invested now will grow substantially by retirement. Do not wait until you can afford to invest large sums — start with what you can.
2. Use Tax-Efficient Wrappers
In the UK, take full advantage of ISAs (£20,000 annual allowance) and pensions (with tax relief). Tax-free growth means compound interest works on your full returns rather than after-tax returns. Over decades, this tax saving itself compounds into a significant amount. A workplace pension with employer matching is effectively free money that also compounds.
3. Make Regular Contributions
Set up a standing order to invest automatically each month. Regular contributions benefit from pound-cost averaging (buying more units when prices are low) and ensure you are consistently adding to your compounding base. Even £50 per month at 5% grows to over £41,000 in 30 years.
4. Reinvest All Returns
For investment accounts, choose accumulation units rather than income units so dividends are automatically reinvested. For savings accounts, avoid withdrawing interest. Every pound of interest left in the account becomes part of the base that generates future interest.
5. Seek Higher Returns (with Appropriate Risk)
Over long periods, higher interest rates or investment returns create dramatically different outcomes due to compounding. A 7% return doubles your money roughly every 10 years; a 3% return takes 24 years. However, higher returns typically come with higher risk. Match your investment strategy to your time horizon and risk tolerance. For money you need within 5 years, prioritise capital security; for 20+ year horizons, consider growth-oriented investments.
6. Minimise Fees
Investment platform fees and fund management charges reduce your effective return and therefore reduce the compounding effect. A seemingly small difference of 0.5% in fees can cost tens of thousands of pounds over a 30-year investment period. Choose low-cost index funds and platforms with competitive fee structures.
Common Mistakes with Compound Interest
1. Confusing Nominal and Effective Rates
The stated (nominal) rate on a savings account or investment is not the same as the effective rate when compounding is involved. A 5% nominal rate compounded monthly gives an effective annual rate of 5.12%. When comparing financial products, always look at the AER (Annual Equivalent Rate) or APR (Annual Percentage Rate) for a fair comparison.
2. Ignoring Inflation
Compound interest grows your money in nominal terms, but inflation erodes purchasing power. If your savings earn 3% but inflation is 2.5%, your real return is only 0.5%. For long-term planning, always consider real (inflation-adjusted) returns. Use our calculator by entering your interest rate minus the expected inflation rate to see approximate real growth.
3. Withdrawing Interest
Taking interest out of your savings account breaks the compounding cycle. The interest you withdraw can no longer earn interest itself, dramatically reducing long-term growth. If you are saving for a long-term goal, choose an account that reinvests interest automatically and resist the temptation to dip into your savings.
4. Starting Late
Waiting to invest until you have a large lump sum costs you valuable compounding time. Starting with small regular contributions immediately is almost always better than waiting to invest a larger amount later. The years of compounding you miss by waiting are impossible to recover.