Compound interest is often called the “eighth wonder of the world” for a reason. It’s the secret behind how small, consistent savings can turn into a large nest egg over time. Whether you’re saving for retirement, a big purchase, or just want to watch your money grow, understanding compound interest is key to reaching your goals.
This calculator is designed to help you see the real impact of compounding on your savings and investments. By adjusting your inputs, you can explore different scenarios and make smarter financial decisions.
What is Compound Interest?
Compound interest is one of the most powerful tools for building wealth. It’s the process where you earn interest not just on your initial investment, but also on the interest that investment has already earned. Over time, this “interest on interest” effect can turn even small, regular contributions into a substantial sum.
The beauty of compounding is that it rewards patience. The longer you leave your money invested, the more dramatic the results. That’s why starting early—even with modest amounts—can make a huge difference in the long run.
- You earn interest on your original amount (the principal).
- That interest is added to your balance.
- Next period, you earn interest on the new, larger balance.
- The longer you leave your money invested, the more dramatic the growth.
Example: The Magic of Compounding
Let’s say you invest £1,000 at a 10% annual interest rate:
| Year | Start Total | Interest Earned | End Total |
|---|---|---|---|
| 1 | £1,000 | £100 | £1,100 |
| 2 | £1,100 | £110 | £1,210 |
| 3 | £1,210 | £121 | £1,331 |
Notice how the interest earned increases each year, even though you didn’t add any more money. That’s the magic of compounding!
If you keep adding to your investment regularly, the effect is even greater. Regular contributions, combined with compounding, can help you reach your financial goals faster than you might expect.
How to Use This Compound Interest Calculator
Our calculator is simple and flexible—perfect for savers, investors, and anyone planning for the future. It’s a great way to experiment with different savings strategies and see how changes in your contributions, interest rate, or time horizon can affect your results.
- Enter your initial investment amount.
- Add any regular contributions (monthly, yearly, etc.).
- Choose your investment timeframe.
- Set your expected interest rate.
Once you’ve entered your details, you’ll instantly see:
- Your total contributions
- The total interest earned
- The final balance at the end of your chosen period
- A year-by-year breakdown of your investment growth
The Compound Interest Formula
If you want to calculate compound interest yourself, here’s the formula:
A = P × (1 + r/n)nt
Where:
- A = The final amount (your balance after interest)
- P = The principal (your initial investment)
- r = The annual interest rate (as a decimal, so 5% becomes 0.05)
- n = The number of times interest is compounded per year (e.g., 12 for monthly, 1 for yearly)
- t = The number of years you leave your money invested
Example:
If you invest £1,000 at 5% annual interest, compounded monthly, for 10 years:
- P = £1,000
- r = 0.05
- n = 12
- t = 10
Plug these into the formula:
A = 1,000 × (1 + 0.05/12)12×10 ≈ £1,647
This shows how compounding can grow your money over time, especially when interest is added frequently and you invest for longer periods.
Why the First £100,000 is the Hardest
You might have heard the saying, “The first £100,000 is the hardest.” This is especially true when it comes to saving and investing with compound interest.
In the early years, your savings grow slowly because most of your balance comes from your own contributions. It can feel like you’re not making much progress, and it takes discipline to keep going. But as your balance grows, compounding starts to work its magic:
- In the beginning, most of your growth comes from what you save.
- As your balance increases, the interest you earn each year gets bigger and bigger.
- Eventually, your investments start earning more in interest than you’re contributing yourself.
Example: When Interest Overtakes Contributions
Let’s say you invest £5,000 per year at a 7% annual return. Here’s how your total contributions and total interest earned might look over time:
| Year | Total Contributions | Total Interest Earned | Total Balance |
|---|---|---|---|
| 1 | £5,000 | £350 | £5,350 |
| 5 | £25,000 | £4,409 | £29,409 |
| 10 | £50,000 | £20,648 | £70,648 |
| 15 | £75,000 | £52,093 | £127,093 |
| 20 | £100,000 | £104,486 | £204,486 |
Notice how, by year 20, the interest earned (£104,486) is now greater than the total amount you’ve contributed (£100,000). This is the tipping point where compounding really takes off and your money starts working harder than you do!
So if you’re just starting out, don’t get discouraged by slow progress. Stick with your plan, keep saving, and remember: the hardest part is getting started, but it gets easier (and more exciting) as you go!
Why Start Early?
The earlier you start, the more time your money has to grow. Even small amounts can add up thanks to compounding. If you’re saving for retirement, a house deposit, or your child’s education, time is your best friend.
It’s never too late to start, but giving your money more years to grow can make a dramatic difference. The key is consistency—keep saving and let compounding do the heavy lifting.
Tips for Maximizing Compound Interest
Want to get the most out of compound interest? Here are some practical tips to help you supercharge your savings and investments:
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Start as soon as possible—even small amounts matter!
- The earlier you begin, the more time your money has to grow. Even if you can only save a little each month, starting now can make a big difference over the years.
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Make regular contributions to boost your growth.
- Consistency is key. Setting up automatic monthly deposits means you’re always adding to your balance, which increases the compounding effect.
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Reinvest your interest to keep compounding working for you.
- Don’t withdraw your interest—let it stay in your account so it can earn even more interest in the future. This is the heart of compounding!
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Increase your contributions over time.
- If you get a raise or your expenses go down, try to increase how much you save. Even small increases can have a big impact over the long term.
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Choose accounts or investments with frequent compounding.
- Interest that compounds monthly or daily will grow your money faster than annual compounding, all else being equal.
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Watch out for fees and taxes.
- High fees or taxes can eat into your returns. Look for low-cost accounts and be aware of how taxes affect your net gains.
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Be patient: compounding rewards those who give it time.
- The biggest gains from compounding often come in the later years. Stick with your plan and let time do the work for you.
By following these tips, you’ll put yourself in the best position to take full advantage of compound interest and reach your financial goals faster.
Frequently Asked Questions
How often is interest compounded?
It depends on the account or investment—common options are yearly, monthly, or even daily. The more frequent the compounding, the faster your money grows. Always check the terms of your savings or investment product.
Does inflation affect compound interest?
Yes, inflation can reduce your real returns. Try to choose investments that outpace inflation over the long term. If you’re saving for a house deposit, our Mortgage Deposit Calculator can help you see how your savings might grow. Remember, the goal is to grow your money faster than prices rise.
Is compound interest only for savings accounts?
No! Compound interest applies to savings, ISAs, investment accounts, and even some pensions. If you’re interested in tax-free growth, try our ISA Calculator to see how ISAs can boost your returns. The principles are the same, whether you’re saving in a bank account or investing in the stock market.
Ready to see your money grow? Use our calculator above and start planning your financial future today!
If you have questions about how compound interest works or want to learn more about smart saving and investing, check out our other guides or get in touch. We’re here to help you make the most of your money!