Compound interest explained: how your savings really grow
Compound interest means earning interest on your interest, not just on the money you put in. Over a few years it makes a modest difference. Over decades it makes a huge one.
Simple vs compound interest
Put £10,000 away at 4% a year for 10 years.
- With simple interest, you'd earn £400 every year, ending with £14,000.
- With compound interest, each year's interest is added to your balance and earns interest itself. You'd end with about £14,802.
How a lump sum grows
| £10,000 at | 5 years | 10 years | 20 years |
|---|---|---|---|
| 3% | £11,593 | £13,439 | £18,061 |
| 4% | £12,167 | £14,802 | £21,911 |
| 5% | £12,763 | £16,289 | £26,533 |
Notice how the 20-year column pulls away from the others. That's compounding at work.
Saving a little each month
Save £200 a month at 4% and you'd have about £13,260 after 5 years, £29,450 after 10 years and £73,355 after 20 years. Over 20 years you'd have paid in £48,000, so more than £25,000 of that pot is interest.
The rule of 72
A quick way to estimate how long it takes money to double: divide 72 by the interest rate. At 4%, that's about 18 years. At 6%, about 12.
What eats into compounding
Inflation. If prices rise faster than your interest rate, your money buys less over time even as the balance grows.
Tax. Interest above your personal savings allowance is taxed, which slows growth. Cash ISAs avoid this.
Withdrawals. Taking interest out stops it compounding. Leaving it in is what makes the long-term numbers work.
Try your own numbers
The savings calculator shows how a lump sum, regular deposits or both would grow at any rate you choose.