Compound interest is the process of earning interest on your interest — your returns generate their own returns, which generate their own returns, building on itself exponentially over time. Over long periods, the difference between simple and compound growth is staggering.

Simple vs. Compound: The Core Difference

Simple interest earns only on the original principal. £10,000 at 7% simple interest earns £700 every year — always on the same base.

Compound interest earns on principal plus accumulated interest. Year one: £700. Year two: £749. Year three: £801. Each year's base grows.

The Formula

A = P(1 + r/n)^(nt)P = principal · r = annual rate · n = compounds/year · t = years

The Same £10,000 Over 30 Years

ScenarioFinal ValueInterest Earned
Simple @ 7%£31,000£21,000
Compound annually @ 7%£76,123£66,123
Compound monthly @ 7%£81,165£71,165

The Rule of 72

Divide 72 by your annual return rate to find how many years it takes to double your money:

Time Is the Most Powerful Variable

Consider two investors, both earning 8% annually:

By age 62 — Alice has £349,888. Bob has £272,126. Alice wins by £77,000 despite investing £48,000 less. The only difference: she started 10 years earlier.

Compound Interest Works Against You Too

A £5,000 credit card balance at 20% APR, on minimum payments, takes over 25 years to repay and costs more than £10,000 in interest. The same maths that builds wealth destroys it when you're the borrower. Eliminating high-interest debt is the highest guaranteed "return" available.