A Simple Guide to Starting Your Investment Journey
Find out if investing could be right for you, and how to start choosing suitable investments.
What is compound interest?
Albert Einstein famously described compound interest as the 8th wonder of the world! And it does appear to work in mysterious ways at first glance. How can £20 per month turn into £65,271 after 40 years when you’ve only actually deposited £9,600*?
However, the reason it works comes down to something pretty simple: once interest starts being earned on amounts that have already had interest added to them, savings can snowball. That’s because when interest is earned on the original sum, it is added to the total and this larger total now has the ability to earn even greater interest. Imagine that snowball rolling down the hill… as it gets bigger, it just picks up even more snow.
* Based on an assumed 8% annual growth rate.
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How to use the calculator
Thankfully, you don’t need Albert Einstein’s brainpower to work out the how much of a difference compound interest could make to your investment or savings pot. We’ve provided this calculator to do the maths for you.
1. To find out how much your original sums could snowball into when you add in the effect of compound interest, simply enter:
- your starting amount
- the time period your pot will stay invested/in a savings account paying interest
- the interest rate you are expecting to receive
- how often you’ll receive that interest (daily, monthly, annually etc)
- any additional contributions you expect to add to the pot
- and, at what point you’ll be making those contributions
It’s not a simple calculation! But you can get answers to your questions in one push of a button with this tool.
2. You can also use the calculator to set a target and work out what you need to contribute to reach a set amount by a certain date.
In this case, you need to enter:
- your target amount
- your starting amount
- the interest rate you are expecting to receive
- how often you’ll receive that interest (daily, monthly, annually etc)
- any additional contributions you expect to add to the pot
- and, at what point you’ll be making those contributions
… and the calculator will tell you how long it is likely to take you. If it’s longer than you wish, try adjusting amounts or interest rates to see the difference it makes.
Situations where this calculator is helpful
The compound interest calculator usage is not limited to assessing investment growth on a cash savings account or Cash ISA. It can also be used for:
- Setting saving goals: Estimate how much you need to save in order to achieve your goal in a given time period.
- Investment planning: Project long-term returns on investments like ISAs, bonds, mutual funds, ETFs or adjust your overall investment portfolio strategy.
- Comparing interest rates: See how different rates and compounding frequencies affect total returns. Examine if it is worth changing to another high-yield savings account or banking provider.
- Retirement forecasting: Calculate future nest egg value with or without monthly contributions.
- Loan cost estimation: Understand how much interest accumulates over time on compound-based loans.
- Education funds: Plan how much to set aside now to reach a target amount for school fees.
We find it especially useful for testing “what-if” scenarios and making smart, data-informed financial decisions.
For example, what if my equity investments grow faster and annual return rate is 9% instead of 6%? How much more will I have in 10 years if I save £200 monthly instead of £100?
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FAQ
How long it will it take £10,000 to double at 8% compound interest?
Approximately 8 years and 9 months. The exact time depends on compounding frequency. If compounded daily, you will reach £20,000 one month earlier in 8 years in 8 months.
Where can I get interest compounded daily?
First check if your bank and account type already has daily, monthly or annual compounding. In the UK daily compounding is the most common compounding frequency on Easy-Access Savings accounts and Cash ISAs. However, regular savings accounts might use monthly compounding.
What is the rule of 72?
The Rule of 72 is a quick and easy mental math formula used to estimate how long it will take for an investment to double, based on a fixed annual interest rate. The formula is Years to Double = 72 / Annual Interest Rate.
What is the Effective Annual Interest Rate (EAR)?
The Effective Annual Interest Rate (EAR), also known as the annual equivalent rate (AER) or effective annual yield, is the actual interest rate an investor or borrower earns or pays in a year after accounting for the effects of compounding. It provides a more accurate reflection of the true cost or return of a financial product than the nominal rate, especially when interest is compounded more than once per year. Main point is that higher the compounding frequency the higher the EAR.
Is daily compounding better than monthly?
Yes. Higher the compounding frequency, the more interest you earn. The difference is often small, but daily compounding will still put a little more money in your pocket.
What is a compound interest calculator?
A compound interest calculator estimates the future value of an investment or loan by factoring in interest that compounds over time. It requires inputs like principal, rate, time, and compounding frequency. Unlike simple interest, it includes interest on previous interest, making it useful for financial planning and long-term growth predictions.
