Compound Interest Calculator
Calculate how your investments grow with the power of compound interest. See the magic of compounding in action.
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Compound Interest Formula
Future Value = P(1 + r/n)^(nt) + PMT × [((1 + r/n)^(nt) - 1) / (r/n)]
Where: P = Principal, r = Rate, n = Compounding frequency, t = Time, PMT = Monthly contribution
Understanding Compound Interest in the UK
The Real Reason Your Savings Grow Faster Than You Expect
Most people understand that savings grow over time. Far fewer understand why compound interest is sometimes called the eighth wonder of the world. Here's the difference between simple interest and compound interest in plain terms.
Simple interest is what you earn on your original deposit. Put £10,000 in an account paying 5% simple interest, and you earn £500 every year, forever. The interest never grows.
Compound interest is what you earn on your interest. That same £10,000 at 5% compound interest earns £500 in year one. But in year two, you earn 5% on £10,500. That's £525. Year three: 5% on £11,025. That's £551. The interest earns interest, and the growth accelerates.
Why Compound Interest Favours the Patient Investor
The math is unforgiving in the best possible way. The longer your money compounds, the faster it grows. A 25-year-old who invests £200 a month at 6% annual return has approximately £274,000 by age 65. A 40-year-old who invests the same amount at the same rate has approximately £113,000. Same monthly contribution. Fifteen extra years of compound growth makes the difference.
This is why financial advisors often say the best time to start investing was twenty years ago. The second best time is now. Your money cannot travel back in time, but it can start compounding today.
The UK Context: Tax and Inflation
Compound interest in the UK works best inside tax-efficient wrappers. A cash ISA protects the interest you earn from income tax. A stocks and shares ISA protects both growth and interest from capital gains tax. Without these wrappers, HMRC takes a share of your compound growth every year.
Inflation is the silent enemy of compound interest. If your savings grow at 5% but inflation runs at 3%, your real return is 2%. This doesn't mean you shouldn't save. It means you need your money working harder than inflation, which is why most financial planners recommend at least some exposure to investments that have historically outpaced inflation over long periods.
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