Question 1

How does compound interest work?

Accepted Answer

Compound interest means you earn interest on your interest, not just on the original principal. Formula: A = P × (1 + r/n)^(n×t). Where: A = final amount, P = principal, r = annual interest rate (decimal), n = compounding frequency per year, t = years. Example: £10,000 at 5% annual rate, compounded monthly, for 20 years. n=12, r=0.05. A = 10,000 × (1 + 0.05/12)^(12×20) = 10,000 × (1.004167)^240 = £27,126. Without compounding (simple interest): 10,000 + (10,000 × 0.05 × 20) = £20,000. Compounding added an extra £7,126.

Question 2

What is the Rule of 72?

Accepted Answer

The Rule of 72 is a quick mental shortcut to estimate how long it takes an investment to double: Years to double = 72 / annual return rate (%). Examples: 4% annual return → 72/4 = 18 years to double; 6% → 72/6 = 12 years; 8% → 72/8 = 9 years; 10% → 72/10 = 7.2 years; 12% → 72/12 = 6 years. The rule also works in reverse for inflation: 3% inflation → your money halves in purchasing power in 72/3 = 24 years. The Rule of 72 is an approximation — actual results (especially at higher rates) differ slightly. Use the compound interest calculator for precise figures.

Question 3

How much does compounding frequency matter?

Accepted Answer

More frequent compounding produces slightly more growth, though the difference diminishes as frequency increases. Example: £10,000 at 5% annual rate for 20 years. Annual compounding: £26,533. Monthly compounding: £27,126. Daily compounding: £27,183. Continuous compounding: £27,183. The jump from annual to monthly compounding adds £593 over 20 years — meaningful but not transformational. The jump from monthly to daily adds only £57. In practice, most investment accounts compound monthly or daily, and the difference matters far less than the interest rate and contribution amount.

Question 4

How important are regular contributions vs the initial deposit?

Accepted Answer

Regular contributions (sometimes called 'dollar-cost averaging') have a massive impact on the final amount, especially over long periods. Example: £10,000 initial deposit at 5% for 30 years = £43,219 (no monthly contributions). Adding £200/month: final amount = £43,219 + £166,452 = £209,671. The £200/month contributions (£72,000 total cash contributed) grew to £166,452 thanks to compounding. The ratio reverses over time: early in the journey, the lump sum dominates; later, regular contributions dominate. Starting contributions early — even small ones — matters more than waiting to invest a large sum.

Years	No contributions	+ £100/month	+ £200/month
5 years	£12,763	£20,359	£27,955
10 years	£16,288	£33,613	£50,938
20 years	£26,532	£72,049	£117,566
30 years	£43,219	£125,673	£208,127

Compound Interest Calculator

£10,000 invested at 5% — growth over time

Frequently asked questions

Related tools

See the power of compounding work for you