Frequently Asked Questions
What is compound interest?
Compound interest is interest calculated on both the initial principal and the accumulated interest from previous periods. A £10,000 investment at 7% annual compound interest becomes £19,672 after 10 years and £76,123 after 30 years — without adding another pound. The growth accelerates over time because interest earns interest.
What is the compound interest formula?
A = P(1 + r/n)^(nt). A is the final amount, P is the principal, r is the annual interest rate as a decimal, n is compounding periods per year and t is years. Example: £10,000 at 5% compounded annually for 10 years: A = 10,000 × (1.05)^10 = £16,289.
What is the Rule of 72?
Divide 72 by the annual interest rate to estimate how long money takes to double. At 6%, money doubles in about 12 years. At 8%, it doubles in 9 years. At 4%, it takes 18 years. It's a useful mental shortcut for quick planning.
How does compounding frequency affect growth?
More frequent compounding produces slightly higher returns. At 5% for 10 years, £10,000 compounded annually yields £16,289 vs £16,487 compounded daily — a difference of £198. The gap widens at higher rates and over longer periods. UK savings accounts quote AER which already accounts for compounding frequency.
What is a realistic interest rate to use?
UK savings accounts currently offer around 4-5% (2026). Global stock market indices have historically returned 7-10% annually before inflation. UK Premium Bonds offer a tax-free prize equivalent of approximately 4.4% (2026). Past performance does not guarantee future results. Always seek independent financial advice before investing.
How does compound interest work against you on debt?
Compound interest works against you when you're the borrower. Unpaid credit card balances compound — a £5,000 balance at 20% APR left unpaid for 5 years grows to approximately £12,442. Paying off high-interest debt is mathematically equivalent to earning a guaranteed return equal to the debt's interest rate.
