| Year | Contributions | Interest | Balance |
|---|---|---|---|
What Is Compound Interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest, which only applies to the original amount, compound interest causes your money to grow at an accelerating rate — often called "interest on interest."
The standard formula is A = P(1 + r/n)nt, where P is the principal, r is the annual rate, n is the compounding frequency, and t is time in years. When regular contributions are added, the future value of an annuity formula is combined to give the total balance.
How to Use This Calculator
Enter your initial investment amount, the annual interest rate you expect to earn, and the time horizon. You can also add regular contributions — choose a frequency that matches your saving pattern (weekly, fortnightly, monthly, quarterly, or annually). Toggle "contribute at start of period" if your deposits happen at the beginning rather than end of each period.
Results update instantly as you adjust any input. The chart shows your balance growing over time, with a dashed line showing cumulative contributions for comparison.
The Power of Time
The most important variable in compound interest is time. Even modest amounts invested early can grow significantly over decades. This is why financial advisors recommend starting to invest as early as possible — every extra year gives your money another chance to compound.
- At 7% annual return, £10,000 doubles in roughly 10 years (Rule of 72).
- Adding just £100/month at the same rate turns that into over £37,000 after 10 years.
- The longer your time horizon, the more dramatic the compounding effect becomes.
Compound Interest vs Simple Interest
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| Calculation basis | Principal only | Principal + accumulated interest |
| Growth pattern | Linear | Exponential |
| Best for | Short-term loans | Long-term investments |
| Formula | A = P(1 + rt) | A = P(1 + r/n)nt |
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Understanding Compounding Frequency
Compounding frequency determines how often accumulated interest is added back to your principal. The more frequently interest compounds, the faster your balance grows — though the difference between daily and monthly compounding is typically small.
| Frequency | Periods / Year | Common Usage |
|---|---|---|
| Daily | 365 | Savings accounts, money market funds |
| Monthly | 12 | Certificates of deposit, ISAs |
| Quarterly | 4 | Some bonds, corporate accounts |
| Annually | 1 | Government bonds, fixed deposits |
The Rule of 72
The Rule of 72 provides a quick estimate of how long it takes for an investment to double. Simply divide 72 by the annual interest rate. For example, at 6% interest, your money doubles in approximately 12 years (72 ÷ 6 = 12). At 8%, it takes about 9 years.