How compound interest grows savings

Simple interest is calculated only on the original principal. Compound interest adds the earned amount back, so the next period’s interest is charged on a larger base.

At 5% a year, £1,000 of simple interest is £50 every year. Compounded annually, year two earns 5% of £1,050, and so on. The gap looks small at first and larger after a decade or more.

The same idea applies to investments, except the “rate” is not guaranteed. A projection with a smooth 7% is a teaching tool, not a forecast of next year’s market.

Banks may add interest monthly, quarterly, or annually. More frequent compounding at the same nominal rate usually grows the balance a little faster. The difference is often modest compared with the rate itself and how much you deposit.

Regular contributions usually dominate over long horizons. Paying in £200 a month for 20 years adds far more cash than a one-off £1,000, even before growth. Model deposits in the Savings Calculator if that matches how you actually save.

Inflation reduces what a future balance can buy. The Investment Growth Calculator can show an inflation-adjusted figure so you do not treat a large future number as today’s spending power.

In the UK, cash interest may be taxable above personal savings allowances; ISAs can shelter interest and investment growth within annual limits. Use the ISA Calculator for UK wrapper planning and the Roth IRA Calculator for US Roth-style limits.

Platform and fund charges reduce net returns. If you pay 0.5% a year in fees, a 6% gross return is closer to 5.5% net. Lower the rate in the tool to approximate that.

Past performance is not a guarantee. Stress a lower rate so your plan still works if returns disappoint.

Hold two inputs still and change one: rate, term, or monthly amount. That shows which lever matters for your question.

The maths assumes the rate never changes and you never withdraw. Life does both. Recalculate when your rate, contributions, or goal changes.

Confirm important money decisions with an official source or a regulated adviser. These tools are for planning illustrations.