Compound interest means you earn interest on your interest, not just on the money you put in. Each time interest is added, the next lot is worked out on a slightly bigger balance. Over a few years the effect is small. Over decades it does most of the heavy lifting.
Simple versus compound
Put £10,000 away at an example rate of 5% a year for 10 years.
- With simple interest, you earn £500 every year on the original £10,000. After 10 years you have £15,000.
- With compound interest added once a year, the first year earns £500, the second earns £525 (5% of £10,500), and so on. After 10 years you have £16,289.
The extra £1,289 is interest earned on interest. Leave it longer and the gap widens fast.
Time matters more than anything
Here's the same £10,000 at an example 5% a year, compounded annually, left alone:
| Years | Balance | Interest earned |
|---|---|---|
| 10 | £16,289 | £6,289 |
| 20 | £26,533 | £16,533 |
| 30 | £43,219 | £33,219 |
The second 10 years earn more than the first, and the third 10 years earn more again, even though nothing new went in.
It's the same story with regular saving. Put £100 a month away at an example 5%, compounded monthly:
| Years | You pay in | Balance |
|---|---|---|
| 10 | £12,000 | £15,528 |
| 20 | £24,000 | £41,103 |
| 30 | £36,000 | £83,226 |
| 40 | £48,000 | £152,602 |
Going from 30 to 40 years adds £12,000 of payments but nearly £70,000 to the pot. That's why starting a pension in your twenties rather than your thirties makes such a difference. Real returns won't be a steady 5%, and investments can fall as well as rise, but the principle holds.
Monthly versus annual compounding
The more often interest is added, the faster the balance grows, because each payment of interest starts earning sooner. At 5% a year:
- Compounded annually, £10,000 becomes £10,500 after a year.
- Compounded monthly, it becomes about £10,512.
- Compounded daily, about £10,513.
The difference is real but small. Monthly compounding on £10,000 over 10 years gives £16,470 against £16,289 annually. The rate and the time matter far more than how often interest is paid.
What AER means
Because compounding frequency changes the result, UK savings accounts quote an AER (annual equivalent rate). It shows what you'd earn over a year if interest were compounded and left in the account, so you can compare accounts that pay monthly with ones that pay yearly on equal terms. In the example above, 5% compounded monthly is an AER of about 5.12%.
When comparing savings accounts, compare the AER. For borrowing, the equivalent figure is the APR, which also includes fees.
The rule of 72
For a quick estimate of how long it takes money to double, divide 72 by the annual interest rate.
| Rate | Rule of 72 | Actual (annual compounding) |
|---|---|---|
| 2% | 36 years | 35.0 years |
| 4% | 18 years | 17.7 years |
| 6% | 12 years | 11.9 years |
| 8% | 9 years | 9.0 years |
| 10% | 7.2 years | 7.3 years |
It's close enough for back-of-envelope sums. It also works for inflation: at 3% inflation, prices double in about 24 years.
When compounding works against you
The same maths applies to debt, and with credit cards the rates are much higher. Take a £3,000 balance on a card charging an example 2% a month (about 24% a year before compounding, or roughly 26.8% once compounding is included).
- The first month's interest alone is £60.
- Pay a fixed £100 a month and it takes 47 months to clear, costing about £1,627 in interest.
- Pay £200 a month and it's gone in 19 months, with about £602 of interest.
Paying only the minimum is worse still, because minimum payments shrink as the balance falls, so the debt drags on for years. If you can't clear a card, paying a fixed amount above the minimum or moving the balance to a 0% deal makes a big difference. The credit card repayment calculator shows how long your own balance will take.
Making it work for you
- Start early, even with small amounts.
- Leave the interest in rather than drawing it out.
- Compare accounts on AER and borrowing on APR.
- Clear expensive debt before saving at lower rates.
- Remember inflation. A 4% savings rate with 3% inflation is roughly a 1% real gain.
Run your own numbers in the compound interest calculator.
This is general information, not financial advice.
Last reviewed October 2026.