Compound Interest Calculator

What is Compound Interest?

Compound interest is the interest earned on both your initial investment (principal) and the interest that accumulates over time. This creates a "snowball effect" where your money grows exponentially rather than linearly. It's often called the eighth wonder of the world because of its powerful impact on long-term wealth building.

Compound Interest vs Simple Interest

Simple Interest: Calculated only on the principal amount. Interest doesn't earn interest.

Compound Interest: Calculated on the principal plus accumulated interest. Your interest earns interest, leading to exponential growth over time.

The Power of Time

The longer you leave your money invested, the more powerful compound interest becomes. Even small differences in time can result in significant differences in final returns. Starting early, even with small amounts, often results in better outcomes than waiting and investing larger amounts later.

Compounding Frequency

How often interest is calculated and added to your principal affects your returns:

• Annual: Interest calculated once per year
• Quarterly: Interest calculated 4 times per year (faster growth)
• Monthly: Interest calculated 12 times per year (even faster growth)
• Daily: Interest calculated 365 times per year (maximum growth)

Real-World Example

Invest £5,000 at 5% annual interest for 10 years:

• Simple Interest: £7,500 (only earn interest on original £5,000)
• Compound Interest: £8,144 (earn interest on growing balance)
• Difference: £644 extra just from compound growth!