What Is Compound Interest?
Compound interest is often called the "eighth wonder of the world." It is interest calculated on both your initial principal and the interest that has already been added. This creates exponential growth — your money earns interest, and then that interest earns its own interest.
For example, £10,000 invested at 5% per year becomes £10,500 after one year. In year two, you earn 5% on £10,500 (not just the original £10,000), giving you £11,025. The difference seems small early on, but over decades it becomes dramatic.
The Rule of 72
A quick way to estimate how long it takes to double your money: divide 72 by the annual interest rate. At 4% interest, your money doubles in roughly 18 years. At 8%, it doubles in about 9 years. This simple rule demonstrates why even small differences in return rates matter enormously over time.
Why Starting Early Matters
Time is the most powerful ingredient in compounding. Someone who invests £200/month from age 25 to 65 at 7% will accumulate roughly £525,000. If they start at 35, they accumulate roughly £243,000 — less than half, despite contributing for only 10 fewer years. The extra decade of compounding almost doubles the result.
Compound Interest vs Simple Interest
With simple interest, you earn a fixed amount each year based only on your original deposit. With compound interest, you earn interest on the growing total. Over short periods the difference is small. Over 20–30 years, compounding can generate 50–100% more than simple interest at the same rate. This calculator shows both the total and the "compound boost" — the extra amount generated by compounding versus simple interest.