How compound interest actually works
Why starting early — and contributing regularly — matters more than the headline rate.
Compound interest is often summed up as "interest on interest", which is accurate but doesn't quite explain why it matters so much in practice. The real story is about time and contributions working together.
The mechanic, precisely
With simple interest, you only ever earn interest on your original deposit. With compound interest, each period's interest gets added to your balance, and the next period's interest is calculated on that larger balance — including all the interest you've already earned. The gap between the two grows slowly at first and then accelerates, which is why compound growth is often drawn as a curve rather than a straight line.
Why starting early beats a higher rate
Because each period compounds on the last, time in the market (or the account) tends to matter more than a modest difference in rate. A pound left to compound for 30 years does more work than the same pound compounding for 10 years at a noticeably higher rate — simply because it's had three times as many periods to compound over.
Why regular contributions change the picture so much
A single lump sum only ever compounds from the date it's deposited. Regular contributions, by contrast, each start their own compounding clock from the moment they're added — a contribution made in year one has been compounding for the entire term by the end, while one made in the final year has barely started. This is why consistent monthly contributions, even small ones, tend to outperform saving the same total amount as one lump sum at the end.
Monthly vs annual compounding — how much does it actually change?
More frequent compounding produces a slightly higher final balance at the same headline rate, because interest starts earning its own interest sooner. The difference between monthly and annual compounding is real but usually modest — far smaller than the effect of the rate itself, or of contributing regularly rather than not at all.
What this calculator doesn't include
Real savings and investment products come with variable rates, fees, and — outside an ISA or within your Personal Savings Allowance — tax on the interest earned. This calculator projects growth at a fixed rate before any of that, so treat the result as a starting point for comparison, not a guaranteed outcome.
Worked example: £1,000 to start plus £100 a month at 5%, compounded monthly, grows to a final balance where interest earned makes up a meaningful share of the total — on top of the £13,000 actually paid in over 10 years.