Guide · Updated 2026-10-08
Compound Interest Explained with Worked Examples
How compound interest grows a lump sum and regular savings, with figures from the compound interest calculator and a note on what the maths leaves out.
Compound interest means you earn interest on your interest. Over a few years the difference from simple interest is small. Over decades it is large. The Compound Interest Calculator shows the growth year by year, and these examples show how the three main inputs behave.
Example 1: a lump sum
£10,000 left for 20 years at 5% a year with interest added every month grows to £27,126. You paid in £10,000, so £17,126 is interest. Simple interest at the same rate would have given £10,000 × 5% × 20 = £10,000 of interest, so compounding added more than £7,000.
Example 2: regular saving
£100 a month for 10 years at 5% a year grows to £15,528. You paid in £12,000, and £3,528 is interest. Starting with £5,000 and adding £200 a month for 20 years at 5% grows to £95,770: £53,000 paid in and £42,770 of interest.
What matters most
| Input | Effect |
|---|---|
| Time | The biggest factor. Interest earns more interest the longer it stays. |
| Rate | Small changes in rate matter more over long periods. |
| Monthly amount | Pays in more now, and more of it has time to grow. |
Working out how much to save
If you have a target, work backwards. To reach £10,000 in 3 years at 4% a year with nothing saved today, the Savings Goal Calculator shows about £261.91 a month, of which £9,429 is your own money and the rest is interest.
Return on investment is a different measure
The ROI Calculator compares what you put in with what you got out. £1,000 growing to £1,500 over 3 years is an ROI of 50% and an annualised return of 14.47%. The annual figure is not 50% ÷ 3, because growth compounds.
What the calculator leaves out
- Fixed rate. Real savings rates and investment returns change, and investments can lose money.
- Tax and fees, which reduce the real return.
- Inflation, which reduces what the money buys. A balance of £95,770 in 20 years will buy less than £95,770 does today.
- The calculator adds interest monthly and each contribution at the end of its month.
The figures are projections from the numbers you type. They are not forecasts or financial advice.
Frequently asked questions
What is the rule of 72? Divide 72 by the annual rate to estimate the years needed to double money: at 6%, about 12 years.
Does monthly compounding beat yearly? Slightly, at the same nominal rate, because interest starts earning interest sooner.