What Is Compound Interest?

Compound interest explained

Compound interest means you earn interest on your original starting amount and on the interest that has already been added. Over time, that creates a snowball effect: each period starts from a slightly larger balance, so the next interest calculation is based on more money.

For example, if you start with £10,000 and earn 5% interest, the first year earns around £500 before compounding effects. The next year is not calculated from £10,000 again; it is calculated from the new, higher balance.

Simple example

Here is a rounded example of £10,000 growing at 5% per year, compounded monthly.

Open this £10,000 at 5% example in the calculator.

Why compound interest gets stronger over time

The early years can feel slow because most of the balance is still your original starting amount. Later on, a larger share of the final value can come from interest earned on previous interest. That is why time is one of the most important parts of compounding.

What affects compound growth?

• Starting amount: a larger starting balance gives interest more to work with from day one.
• Interest rate: a higher rate increases each compounding step.
• Time: longer periods allow more compounding cycles.
• Compounding frequency: monthly or daily compounding usually produces slightly more than annual compounding at the same quoted rate.
• Regular deposits: monthly contributions can have a big effect because each contribution can also start earning interest.

Compound interest formula

The standard formula is:

A = P(1 + r/n)^(n × t)

In that formula, P is the starting amount, r is the annual interest rate as a decimal, n is the number of compounding periods each year, t is the number of years, and A is the final amount.

When to use the calculator

Use the calculator when you want a quick estimate without manually applying the formula. It can also include regular deposits, inflation adjustment, tax or fees, yearly tables, monthly breakdowns, CSV export and an Excel formula.