Compound interest explained, with real numbers
Compound interest is interest earned on your interest. Each year's growth is added to the balance, so next year you earn on a bigger amount. £10,000 at 4% becomes about £22,226 after 20 years without adding another penny.
£10,000 at 5% for 20 years.
With simple interest you only ever earn on the original £10,000, so you get £500 a year. With compound interest, year two earns 5% on £10,500, year three on £11,025, and so on. The gap grows every year.
£10,000 left to grow at 4% a year.
| After | Balance | Interest earned |
|---|---|---|
| 1 year | £10,407 | £407 |
| 5 years | £12,210 | £2,210 |
| 10 years | £14,908 | £4,908 |
| 20 years | £22,226 | £12,226 |
| 30 years | £33,135 | £23,135 |
Notice how the interest speeds up: the first 10 years add £4,908, but the next 10 add £7,317.
Saving £200 a month.
| Saving for | You pay in | Value at 4% | Value at 7% | Share that is growth (7%) |
|---|---|---|---|---|
| 10 years | £24,000 | £29,450 | £34,617 | 31% |
| 20 years | £48,000 | £73,355 | £104,185 | 54% |
| 30 years | £72,000 | £138,810 | £243,994 | 70% |
Over 30 years at 7%, most of the final pot is growth, not money you paid in. That is why time matters more than almost anything else. (7% is an illustration of long-term investing; investments can fall as well as rise and are not guaranteed.)
A quick way to estimate doubling time.
Divide 72 by the yearly rate to estimate how many years it takes money to double.
| Rate | Rule of 72 estimate | Actual (yearly compounding) |
|---|---|---|
| 3% | 24.0 years | 23.4 years |
| 4% | 18.0 years | 17.7 years |
| 6% | 12.0 years | 11.9 years |
| 8% | 9.0 years | 9.0 years |
Inflation works the same way in reverse. At 3% inflation, prices double in about 24 years, so savings earning less than inflation lose buying power over time.
Practical ways to use compounding.
- Keep interest in the account rather than paying it out, so it compounds.
- Use your ISA allowance: you can put up to £20,000 a year into ISAs in 2026/27 and the growth is tax-free.
- Watch the Personal Savings Allowance: outside an ISA, basic-rate taxpayers can earn £1,000 of interest a year tax-free, higher-rate £500 and additional-rate £0.
- Compounding works against you on debt: unpaid credit card interest is added to the balance and then charged interest too. See how debt interest works.
The compound interest calculator shows the year-by-year growth for any amount, rate and time.
Compound interest FAQs
How often is interest compounded?
Savings accounts usually calculate interest daily and pay it monthly or yearly. The AER (Annual Equivalent Rate) already includes the effect of compounding, so you can compare accounts directly.
Is compound interest guaranteed?
On a fixed-rate savings account the rate is fixed for the term. Variable rates can change, and investment returns are not guaranteed at all.
What is the difference between AER and APR?
AER shows what you earn on savings, including compounding. APR shows what you pay on borrowing, including fees.
MoneyHelper: savings basics · GOV.UK ISAs · GOV.UK tax on savings interest. Figures are worked examples for planning, not financial advice.