The short answer
- Each year’s interest is added to your balance, so next year you earn interest on a bigger sum.
- £10,000 plus £200 a month at 5% grows to £109,333 over 20 years, of which £51,333 is interest.
- The rule of 72 says money doubles in about 72 ÷ the rate years: 12 years at 6%.
- Inflation, tax and charges all reduce what you end up with in real terms.
What compound interest is
- Interest on
- The original amount only
- £10,000 at 5% for 10 years
- £15,000
- Interest on
- The original amount plus past interest
- £10,000 at 5% for 10 years
- £16,289 (added yearly)
The difference starts small but grows every year. After 30 or 40 years, interest on interest is usually the biggest part of a long-term savings pot.
The formula
For a single sum: final amount = starting amount × (1 + rate ÷ n)n × years, where n is how many times a year interest is added.
For regular saving, each monthly payment grows for a different length of time, so the calculator works month by month. You can check a simple case by hand: £10,000 at 5% added once a year for 10 years is £10,000 × 1.0510 = £16,289.
A worked example
- Paid in: £10,000 + £200 × 240 months£58,000
- Interest earned£51,333
- Final balance£109,333
- In today's money, with 2% inflation£73,578
If you raise the monthly saving by 3% a year, in line with pay, the pot reaches £132,326 for £74,489 paid in.
How often interest is added
| Interest added | Final balance |
|---|---|
| Yearly | £16,289 |
| Monthly | £16,470 |
| Daily | £16,487 |
More frequent compounding helps, but only a little. The rate itself and the time invested matter far more.
AER, APR and gross rates
The AER (annual equivalent rate) shows what you would earn in a year once compounding is included, so you can compare accounts that pay interest at different intervals. A 5% rate paid monthly has an AER of 5.116%; paid daily, 5.127%. The gross rate is before tax. APR is used for borrowing and includes fees.
Why starting early matters
Starting at 25 with £200 a month gives £398,298 by 65 at 6%, from £96,000 paid in. Waiting until 35 halves the pot to £200,903. To catch up, you would need to save £400 a month, paying in £144,000.
The rule of 72
| Rate | Exact | Rule of 72 |
|---|---|---|
| 2% | 35.0 | 36.0 |
| 4% | 17.7 | 18.0 |
| 6% | 11.9 | 12.0 |
| 8% | 9.0 | 9.0 |
| 10% | 7.3 | 7.2 |
The same rule works for inflation: at 2% inflation, prices double in about 35 years.
Regular saving and rising contributions
Regular monthly saving builds a pot steadily and smooths out the ups and downs of investing, because you buy more when prices are low. Increasing your contributions each year, for example by the same percentage as your pay rise, keeps saving a constant share of your income.
Real returns after inflation
A balance in the future buys less than the same amount today. With 2% inflation, £109,333 in 20 years is worth about £73,578 in today’s money. The inflation calculator shows how prices and savings change over time. A savings account paying less than inflation is losing value in real terms, even as the balance rises.
The cost of charges
- No charges£446,497
- With 1% a year in charges (5% net)£348,129
Charges compound too. Over 25 years, a 1% annual charge takes about a fifth of the final pot.
Tax on interest and growth
The calculator assumes no tax, as in an ISA or pension. Outside these, interest above your Personal Savings Allowance, dividends above £500, and gains above £3,000 a year are taxed, which slows compounding. The ISA vs GIA calculator shows the difference.
What rate to use
- For a savings account, use the AER, and remember variable rates change.
- For a fixed-rate bond, use the fixed rate for the term.
- For shares, long-term returns have averaged around 4% to 5% a year above inflation in the past, but with large swings and no guarantee.
- Run the calculator with a lower and a higher rate to see a range.
Compounding works against you on debt
The same maths makes unpaid debt grow quickly. A credit card balance at 25% APR doubles in about three years if left unpaid. Paying off high-interest debt is often the best “return” available, because it saves interest at that rate with no risk.
Clear expensive debt first
Before investing for compound growth, pay off credit cards and overdrafts that charge more than you can reliably earn.
How the snowball builds
Compounding feels slow at first. In the default example (£10,000 plus £200 a month at 5%), the interest earned is modest in the early years and only takes off later. The table shows how the share of the balance that comes from interest grows over time.
| After | Balance | Of which interest |
|---|---|---|
| 5 years | £26,435 | £4,435 |
| 10 years | £47,527 | £13,527 |
| 20 years | £109,333 | £51,333 |
In the first five years, interest makes up about a sixth of the balance. By year 20 it is nearly half. The second decade produced £37,806 of interest, almost three times the first decade’s £13,527, even though the same £200 a month went in throughout. That is why the last few years of a long-term plan often add more than the first ten, and why stopping early costs so much.
Small rate differences, big results
Over long periods, a difference of one or two percentage points has a large effect. Here is £250 a month saved for 30 years, with £90,000 paid in each time.
Moving from 4% to 6% adds £77,617, and from 6% to 8% adds a further £121,461. Higher expected returns usually come with more risk, though, so a higher rate is not simply “better”. It is a trade-off between growth and the chance of losses along the way. Try a cautious, a middle and an optimistic rate to see the range of outcomes rather than relying on one number.
Cash savings and inflation
Consumer prices rose by 3.1% in the year to August 2026, above the Bank of England’s 2% target. When inflation is higher than the interest you earn, your balance rises but what it can buy falls.
- Inflation
- 3.1% a year
- Worth in today's money
- £10,986
- Result
- A small real gain
- Inflation
- 3.1% a year
- Worth in today's money
- £8,999
- Result
- A real loss of about £1,000
Left in an account paying nothing, £10,000 would be worth just £7,369 in today’s money after 10 years of 3.1% inflation. Cash is still the right home for an emergency fund and for money you need within a few years, but it is worth checking your rate regularly and moving if a better one is available.
How tax slows compounding
Tax taken from interest each year means less is left to earn interest the next year. Over time, this “tax drag” adds up.
- Tax-free, as in a cash ISA£29,605
- Taxed at 40% each year (2.4% net)£25,353
A higher-rate taxpayer’s Personal Savings Allowance is £500 of interest a year (£1,000 for basic-rate taxpayers and nothing for additional-rate taxpayers), so balances like this soon go over it. This example assumes the whole amount is taxed, to show the effect clearly. The savings tax rates are due to rise by two percentage points from April 2027.
Using ISAs and pensions
The simplest way to let compounding work in full is to use a tax-free wrapper.
- ISAs: you can put up to £20,000 a year in. Interest, dividends and gains are tax-free, and withdrawals are too. From April 2027, under-65s can only put up to £12,000 of that in cash.
- Pensions: contributions get tax relief, and growth inside the pension is tax-free. You usually cannot take the money until 57 (from April 2028), and most withdrawals are taxed as income apart from a 25% tax-free part. See the pension tax relief calculator.
- Lifetime ISA: for people aged 18 to 39 saving for a first home or later life, the government adds 25% to up to £4,000 a year.
Using the calculator well
- Enter what you have now and what you plan to add each month.
- Choose a rate. For cash use the AER; for investments use a cautious long-term figure after charges.
- Set the number of years, for example until you retire or need the money.
- Under “More options”, set how often interest is added, any yearly rise in your saving, and an inflation rate.
- Read the result in today’s money as well as in pounds, and use the chart to see any year along the way.
Share the link to save your figures, or to compare two plans side by side in different tabs.
Common mistakes
- Ignoring inflation. A big number in 30 years is less impressive in today’s money.
- Using a rate before charges. Take fund and platform charges off the expected return first.
- Assuming a steady return. Investments rise and fall. The calculator shows a smooth path, which real markets never follow.
- Dipping in. Withdrawing early stops the money compounding. Keep a separate emergency fund in cash.
- Leaving cash in a low-rate account. Many easy-access accounts pay far less than the best rates available.