How compound interest works

Simple vs compound growth

With simple interest, you earn only on the original amount each period. With compound interest, earned interest is added to the balance, so the next period's interest is calculated on a larger base. Over years, that difference becomes dramatic—the curve bends upward even when the annual rate stays the same.

Most UK savings accounts and investment returns compound in practice, though the timing varies: some accounts credit interest daily, monthly, or annually. More frequent compounding at the same headline rate produces a slightly higher effective return.

AER and comparing products

When banks quote AER (Annual Equivalent Rate) on savings, they are showing what the rate would be if interest were paid and compounded once per year. That makes it easier to compare accounts with different payment schedules. APR on borrowing plays a similar comparison role, though loans include fees and repayment structures that AER does not capture for savers.

Always read terms: introductory bonus rates expire, notice periods apply on some accounts, and investments can fall in value—unlike FSCS-protected cash up to applicable limits.

Time and regular contributions

Two levers matter almost as much as the rate: how long money stays invested, and whether you add to it regularly. Starting earlier or increasing monthly contributions often beats chasing an extra fraction of a percent on rate, especially once fees and tax are considered.

The rule of 72 is a quick mental check: divide 72 by an annual percentage to estimate years to double. It is approximate but helpful for conversations and sanity checks.

What calculators cannot tell you

Spreadsheet and online models assume smooth, constant returns. Real markets fluctuate; cash rates change after Bank of England decisions; inflation erodes purchasing power even when your balance grows. Use calculators to learn relationships between inputs, not to forecast exact future wealth.

Related tools

Try the compound interest calculator, savings growth, and rule of 72 tools. See also compound interest in the glossary.