How does compound interest work?

Compound interest means you earn interest on both your original principal and the interest already accumulated. For example, £1,000 at 5% annual interest earns £50 in year 1, then £52.50 in year 2 (5% of £1,050), and so on. Over long periods this snowball effect creates dramatically more wealth than simple interest.

How much does £10,000 grow with compound interest?

At 5% annual rate compounded monthly with no additional contributions, £10,000 grows to approximately £16,470 in 10 years and £27,126 in 20 years. Add £200/month and those figures jump to roughly £42,000 and £95,000 respectively. The longer the timeframe, the more compounding dominates.

What is a good compound interest rate for UK savings?

In 2025, UK Cash ISAs offer 4–5%, easy-access savings accounts 4.5–5%, and fixed-rate bonds up to 5.5%. Stocks and Shares ISAs tracking a global index have historically averaged 7–9% annually over 10-year rolling periods, though with more volatility than a cash account.

What is the difference between APR and APY (AER in the UK)?

APR (Annual Percentage Rate) is the stated rate before compounding. APY (Annual Percentage Yield) — called AER in the UK — is the effective rate after compounding is applied. A 5% APR compounded monthly becomes a 5.12% AER. Always compare savings accounts using AER/APY, not APR.

What is the Rule of 72?

The Rule of 72 is a quick mental shortcut: divide 72 by your annual interest rate to find the approximate number of years to double your money. At 6% it takes about 12 years (72 ÷ 6). At 9% it takes 8 years. At 4% (common for UK savings), about 18 years.

Does compounding frequency really matter?

Yes, but the impact is smaller than most people expect. £10,000 at 5% for 10 years: annually → £16,289; monthly → £16,470; daily → £16,487. The difference between monthly and daily is only £17 on £10,000. Contribution amount and rate matter far more than compounding frequency.

How much do I need to save to have $100,000 in 10 years?

At 5% annual rate compounded monthly with no starting balance, you'd need to save approximately $643/month. If you start with $10,000, that drops to about $447/month. Use the calculator to model your exact starting balance and rate.

What compound interest rate does the S&P 500 return?

The S&P 500 has historically returned about 10% annually before inflation, or roughly 7% after inflation (real return). Over any specific 10-year window results vary widely — from as low as 1% to over 17% annualised. Index funds are not savings accounts; short-term volatility is real.

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Compound Interest Calculator

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Annual Interest Rate

Time Period

yrs

Monthly Contribution

About this tool

How your money grows with compounding

The Compound Interest Calculator shows exactly how much your savings or investment grows when interest is reinvested over time — the core principle behind every savings account, ISA, and index fund in the world. Unlike simple interest, compound interest earns interest on interest, which accelerates growth dramatically over long periods.

Three variables drive compound growth:

Rate — a UK Cash ISA at 4.5% and a US S&P 500 index fund averaging 10% produce wildly different outcomes over 20 years.
Frequency — daily compounding beats monthly, which beats annual. The difference is modest on short timescales but meaningful over decades.
Contributions — adding even a small monthly amount (£100 / $200) often matters more than the compounding frequency, especially early on.

This calculator runs a month-by-month simulation so your monthly contributions are applied accurately, not approximated with a closed-form formula.

Example

Scenario: £10,000 starting balance, 5% annual rate, monthly compounding, £300/month contributions, 10 years.

Monthly rate ≈ 0.4167%. After 120 months the balance grows to approximately £69,700.

Total contributed: £10,000 + (£300 × 120) = £46,000. Interest earned: £23,700 — over half a year's contributions generated purely from compounding.

Run the same numbers at 7% (closer to a global equity index fund long-term average) and the final balance jumps to around £77,200, earning £31,200 in interest.