How Compound Interest Works
Updated June 2026 · 6 min read · Free calculator inside
✓ Checked against standard compound-interest formula
Compound interest is interest earned on both your original money and the interest it has already earned. Over time this snowballs into exponential growth, which is why it is often called the most powerful force in investing. Here is how it works and why time matters more than the amount.
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Simple interest is paid only on your original principal. Compound interest is paid on the principal plus all previously earned interest, so each year you earn a little more than the last. On £10,000 at 8% for 30 years, compounding turns it into about £100,000 — far more than simple interest would.
The Rule of 72
A quick way to estimate doubling time is to divide 72 by your annual return. At 8%, money doubles roughly every 9 years; at 6%, every 12 years. It shows how higher returns and longer time horizons compound dramatically.
Why starting early beats investing more
- Investing £200/month from age 25 to 65 at 7% grows to roughly £525,000.
- Waiting until 35 to start the same £200/month leaves you with about £245,000.
- Ten extra years roughly doubles the result — time is the biggest lever.
How often interest compounds
Interest can compound annually, monthly or daily. More frequent compounding grows slightly faster. Most savings accounts and funds effectively compound monthly, which is what our calculator assumes.
Frequently Asked Questions
What is compound interest in simple terms?
It is interest earned on your interest. Each period you earn returns on a slightly larger balance, so growth accelerates over time.
How can I become a millionaire with compound interest?
Investing around £500 a month at a 7–8% long-term return for about 35 years can compound past £1 million. Starting earlier dramatically reduces how much you need to contribute.
Does compound interest beat inflation?
Over long periods, investments compounding at 6–8% have historically outpaced inflation, though returns are not guaranteed and inflation reduces real spending power.
See how your money could grow over time
Skip the maths — get an instant, up-to-date figure with our free calculator.
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⚠️ Disclaimer: This guide is for general information only and does not constitute financial, tax, or legal advice. Rates and thresholds can change — always check the latest figures on GOV.UK and consult a qualified professional before making decisions.