What is Compound Interest?
Compound interest is the interest calculated on both your initial principal and the accumulated interest from previous periods. Albert Einstein reportedly called it the "eighth wonder of the world" because of its powerful growth effect over time.
The Compound Interest Formula
The formula for compound interest is: A = P(1 + r/n)^(nt), where A is the final amount, P is the principal, r is the annual interest rate, n is the number of times interest compounds per year, and t is the number of years.
Why Start Early Matters
The most important factor in compound interest is time. Someone who starts investing £100 per month at age 25 could have significantly more at retirement than someone who starts at age 35, even if they invest more money overall. This is because compound interest has more time to work its magic.
Practical Example
If you invest £10,000 at a 5% annual return compounded monthly, after 10 years you would have approximately £16,470 — that is £6,470 in interest alone. After 20 years, it grows to £27,126, and after 30 years, to £44,677.
Use Our Calculator
Try our compound interest calculator to see how your savings can grow over time with different rates and contributions.