What is compound interest?

Compound interest means you earn interest on your interest, not just on your original principal. For example, £1,000 at 5% earns £50 in year 1, giving £1,050. In year 2 you earn 5% on £1,050 = £52.50, and so on. Over time this snowball effect dramatically accelerates growth, especially with regular contributions. This is why starting early has such a disproportionate effect on long-term savings.

How often does interest compound in this calculator?

This calculator compounds interest monthly, which is typical for savings accounts, ISAs, and investment platforms. Annual compounding gives a slightly lower result; daily compounding gives slightly higher. The difference between monthly and daily compounding is small at typical savings rates.

What interest rate should I use?

For cash savings accounts, use the current AER (Annual Equivalent Rate) quoted by your bank, typically 4-5% in the current environment. For a Stocks and Shares ISA or global equity fund, historical returns have averaged around 7-8% per year before inflation over the long run, but past performance is not guaranteed. For inflation-adjusted projections, subtract the expected inflation rate (typically 2-3%) from your nominal rate.

How does this compare to a simple interest calculation?

Simple interest calculates interest only on the original principal every period. Compound interest reinvests the interest, so you earn more in later years. On £10,000 at 5% for 20 years, simple interest gives £20,000; compound interest gives approximately £26,533. That is a difference of over £6,500, purely from reinvesting the interest.

How can I maximise the effect of compound interest?

Three levers matter most: (1) Time: starting earlier is the most powerful factor, even if initial contributions are small. (2) Rate: a higher return or lower-fee investment significantly boosts long-term outcomes. (3) Regular contributions: adding to your pot consistently means you are always putting new money to work early. Automating monthly contributions and using a tax-efficient wrapper like an ISA (so you keep all the gains) compounds both wealth and good habits.

Why does the calculator show a lower "today's money" value?

Inflation reduces the spending power of money over time, so £1 in 20 years will not buy as much as £1 today. The calculator discounts your projected final balance by the assumed inflation rate (2.5% by default, based on long-run UK averages) to show what that balance would be worth in today's prices. This does not change your actual projected balance, it just helps you judge how much real purchasing power your investment provides. Set the inflation rate to 0% to see the figures without any adjustment.

Savings & Investing

Compound Interest Calculator

See how your savings grow over time with the power of compound interest. Add a lump sum, regular monthly contributions, and watch the snowball effect over years.

Updated April 2026

Your details

Initial deposit

Monthly contribution

Annual interest / growth rate

Years

Assumed inflation rate

Used to show your projected balance in today's spending power. Set to 0 to ignore inflation.

Your results

Growth of £5,000 Over 20 Years

Final balance after 20 years

£96,112

≈ £58,655 in today's money, after 2.5% inflation

Interest earned

£43,112

Total contributed: £53,000
Growth: 81%

Where the money comes from

You: £53,000Growth: £43,112

Investing an initial £5,000 plus £200 per month for 20 years at 5% could grow to £96,112 — £53,000 from your own contributions and £43,112 from investment growth. Adjusted for 2.5% inflation, that's worth roughly £58,655 in today's money.

Year-by-year projection

Year	Contributions	Interest	Balance
1	£7,400	£322	£7,722
2	£9,800	£783	£10,583
3	£12,200	£1,390	£13,590
4	£14,600	£2,152	£16,752
5	£17,000	£3,075	£20,075

How compound interest works

Compound interest means earning interest on your interest, not just on your original deposit. Each period, the interest you've already earned is added to your balance and itself starts generating returns. Over long time horizons, this creates exponential growth rather than linear growth.

A simple example: £10,000 invested at 5% per year for 20 years. With simple interest you'd earn £10,000 in interest, ending with £20,000. With annual compounding you'd end with £26,533, an extra £6,533 purely from compounding. The more frequently interest compounds (monthly vs annually), the greater the effect.

The Rule of 72

A quick mental shortcut: divide 72 by your annual interest rate to estimate how many years it takes to double your money. At 6%, your money doubles in roughly 12 years. At 4%, about 18 years. At 9%, just 8 years.

This rule illustrates why rate of return matters so much over long periods. The difference between a 4% and a 7% return on a pension pot over 30 years is not 75% more money, it's more than double, thanks to compounding.

Regular contributions amplify the effect

Adding regular contributions, monthly savings into an ISA or pension, supercharges compounding further. Each new contribution starts compounding from the day it's deposited, meaning earlier contributions have the longest runway. This is why starting to save in your 20s versus your 40s can result in dramatically different outcomes even with the same total contributions.

The calculator above models both a lump sum and regular monthly contributions. Try increasing the monthly contribution by a small amount, even £50/month extra over 20 years at 5% adds over £20,000 to the final pot.

Where to find compound interest working for you

The most powerful applications of compound interest in personal finance are pensions and Stocks & Shares ISAs. Both shelter returns from tax, allowing the full compounding effect to work without annual tax drag. Cash ISAs and savings accounts compound too, but lower interest rates limit the effect, over 20–30 years the difference between a cash return and an equity return is substantial.

Related calculators

ISA Calculator Pension Calculator Savings Goal Calculator Inflation Calculator

Frequently asked questions

Sources & methodology

Built and maintained by Tim, a personal finance enthusiast (not a financial adviser). Last reviewed April 2026. Rates and thresholds come from official UK government publications.

GOV.UK · UK government legislation and guidance
HMRC · Tax rates, thresholds and official guidance

Figures are estimates only. This is not financial or tax advice. For help with your specific situation, speak to HMRC or a qualified adviser.