Compound Interest Calculator

Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. Unlike simple interest (which is only calculated on the principal), compound interest grows exponentially over time. Einstein is often quoted as calling it the eighth wonder of the world — the longer you leave money to compound, the more dramatic the growth becomes.

The more frequently interest compounds, the more you earn. Daily compounding earns slightly more than monthly, which earns more than annually. In practice, most savings accounts compound monthly or daily. The difference between monthly and daily compounding on a typical savings account is small, but over long periods and large sums it becomes meaningful.

The Rule of 72 is a quick way to estimate how long it takes to double your money. Divide 72 by your annual interest rate. For example, at 6% interest, your money doubles in approximately 72 ÷ 6 = 12 years. At 9%, it doubles in about 8 years. It is a useful mental shortcut for understanding the power of compound interest.

APR (Annual Percentage Rate) is the simple annual interest rate without accounting for compounding. APY (Annual Percentage Yield) reflects the actual return including compounding within the year. For example, a 6% APR compounded monthly results in an APY of about 6.17%. When comparing savings accounts or investments, APY is the more accurate figure to use.

For investments like stocks, mutual funds and ETFs, returns are typically expressed as an annual percentage. If your investment grows at 7% per year and you reinvest all dividends and gains, your returns compound annually. The key principle is the same: your gains generate further gains. A £10,000 investment growing at 7% per year becomes approximately £19,672 after 10 years and £76,123 after 30 years — purely through compounding.

Both strategies benefit from compounding, but regular contributions (called dollar-cost averaging) have the advantage of reducing timing risk — you buy at different price points over time. A lump sum invested early benefits from more time in the market. Ideally, investing a lump sum as early as possible while also making regular contributions gives the best long-term outcome.