- What is Compound Interest?
- How is Compound Interest Calculated?
- Why Does Compound Interest Matter?
- How to Use Our Compound Interest Calculator
- Simple Interest vs Compound Interest
- What is the Snowball Effect?
- How Often is Interest Compounded?
- How Can Compound Interest Benefit You?
- How Compound Interest Can Work Against You
- What is the Rule of 72?
- How Do You Make a Compound Interest Calculator in Excel?
Curious about how your money can grow over time? Our Compound Interest Calculator helps you estimate the potential growth of your savings or investments in just a few seconds.
Compound interest is a powerful financial concept—it can help build wealth over time or increase your debt if not managed properly. Whether you're saving for a home, investing for retirement, or comparing loan options, understanding how compounding works gives you a financial advantage.
So, what is compound interest? How is it calculated? How can it benefit you? Find out everything you need to know in our complete guide—including how to create your own Compound Interest Calculator in Excel.
What is Compound Interest?
Compound interest means earning "interest on interest"—in other words, you earn interest not just on your initial deposit (principal) but also on the interest that accumulates over time.
For example
Imagine you deposit £1,000 in a savings account offering 5% annual interest, compounded yearly.
- Year 1: You earn £50 (5% of £1,000), bringing your total to £1,050.
- Year 2: You earn 5% on £1,050 (£52.50), bringing your total to £1,102.50.
- Year 3: You earn 5% on £1,102.50, and so on…
Over time, your money grows faster because interest keeps compounding!
How is Compound Interest Calculated?
The formula for compound interest is:
A = P (1 + r/n)^{nt}A = P (1 + r/n)^nt
Where:
- A = Final amount
- P = Principal (initial deposit)
- r = Annual interest rate (decimal form)
- n = Number of times interest is compounded per year
- t = Number of years
For example
You invest £5,000 at an 8% annual interest rate, compounded quarterly for 10 years.
A = 5000 × (1 + (0.08/4)) ^ 4 × 10
After 10 years, your investment grows to about £10,965—more than double your initial deposit!
Why Does Compound Interest Matter?
Compound interest isn’t just about numbers—it’s about time and consistency. The earlier you start investing, the more time your money has to grow exponentially.
For example
- Tom starts investing £200 per month at age 25 for 30 years. By age 55, his investment grows to £293,219.
- Sophie starts investing £300 per month at age 35 for 20 years. By age 55, her investment grows to £176,125.
Even though Sophie invests more per month, Tom ends up with more money because his investments had more time to compound!
The earlier you start saving, the bigger your wealth can grow through compounding. Even small investments can snowball into significant savings over time!
How to Use Our Compound Interest Calculator
Our free Compound Interest Calculator makes it easy to see how your savings or investments will grow. Simply:
- Enter Your Initial Investment – e.g., £5,000
- Choose Your Interest Rate – e.g., 6%
- Select the Compounding Frequency – Daily, Monthly, Quarterly, or Annually
- Enter the Investment Duration – e.g., 20 years
- Add Regular Contributions (Optional) – e.g., £200 per month
- See Results – Instantly see how much your investment will be worth!
Simple Interest vs Compound Interest
While both simple and compound interest involves earning or paying interest, the key difference is how interest is calculated over time.
| Feature | Simple Interest | Compound Interest |
|---|---|---|
| How It Works | Earns interest only on the original deposit | Earns interest on both the principal and accumulated interest |
| Growth Speed | Slower | Faster |
| Example | A £1,000 deposit at 5% for 10 years earns £500 | A £1,000 deposit at 5% for 10 years earns £628 |
Expert advice
- If you're borrowing money, simple interest is better since interest doesn’t compound—you only pay interest on the original amount.
- If you're saving or investing, compound interest is better because it accelerates growth over time.
What is the Snowball Effect?
The snowball effect describes how compound interest grows your money exponentially.
Imagine rolling a small snowball down a hill—it picks up more snow and gets bigger as it rolls. That’s exactly how compounding works! The longer your money is invested, the bigger it grows.
The Power of Starting Early
Let’s say you invest £100 per month in a stocks & shares ISA with an average annual return of 7%.
- If you start at age 25, by the time you’re 65, you could have around £240,000.
- If you start 10 years later at 35, you’d have only £115,000—less than half!
The difference? Time. The earlier you start, the longer your investments have to compound and grow.
Even small, consistent contributions can snowball into a significant amount over time, making investing one of the most powerful tools for building wealth.
How Often is Interest Compounded?
The compounding frequency affects how fast your money grows.
| Compounding Frequency | Effect on Growth |
|---|---|
| Daily | Fastest growth |
| Monthly | Slower than daily but still strong |
| Quarterly | Moderate growth |
| Annually | Slowest growth |
The more frequently interest is compounded, the more you earn!
How Can Compound Interest Benefit You?
- Boosts Savings – The more you save, the bigger your wealth grows over time.
- Grows Retirement Funds – Pensions and ISAs benefit hugely from compounding.
- Increases Investments – Stocks and bonds reinvest earnings, fuelling long-term wealth.
For example
If you start investing £200/month at age 25 with an 8% return, by retirement (age 65), you’ll have over £600,000. If you wait until age 35, you'll have only £270,000!
How Compound Interest Can Work Against You
While compound interest helps savings grow, it can hurt you with debt—especially credit cards and loans.
For example
If you have a £5,000 credit card balance at 20% interest, compounded monthly, and make only minimum payments, you could end up paying thousands in extra interest!
Avoid This Trap: Always pay more than the minimum on your debts to stop interest from piling up.
What is the Rule of 72?
The Rule of 72 is a simple way to estimate how long it takes to double your money with compound interest.
Years to Double = 72/Interest Rate
At a 6% interest rate, your money will double in 12 years.
Below is a table showing how an initial investment of £1000 grows over 10 years with a 6% annual interest rate.
| Year | Investment Value (£) |
|---|---|
| 0 | 1000.00 |
| 1 | 1060.00 |
| 2 | 1123.60 |
| 3 | 1191.02 |
| 4 | 1262.48 |
| 5 | 1338.23 |
| 6 | 1418.52 |
| 7 | 1503.63 |
| 8 | 1593.85 |
| 9 | 1689.48 |
| 10 | 1790.85 |
How Do You Make a Compound Interest Calculator in Excel?
Creating your own Compound Interest Calculator in Excel is easy:
- Set Up Your Spreadsheet with columns for Principal, Interest Rate, Years, and Future Value.
- Enter the Formula: =B1*(1+(B2/100)/B3)^(B3*B4)
- Create a Yearly Growth Table (Optional) to track progress.
- Format & Visualise with a line chart.
- Test Different Scenarios to see how savings grow over time!
Want instant results? Use our HelloSafe Compound Interest Calculator to see how your money will grow over time!
