Compound Interest
What is compound interest?
Compound interest is when you earn interest (money a bank pays you) not just on your original money, but also on the interest you’ve already earned. Your money grows faster because each year’s growth builds on the last.
How does compound interest work?
Say you put £1,000 in a savings account and earn 5% a year. After year one, you have £1,050. In year two, you earn 5% on £1,050 (not just £1,000), giving you £1,102.50. Each year, the amount you earn gets bigger.
Why does compound interest matter?
Over long periods, compounding makes a huge difference. £10,000 invested at 7% for 30 years becomes about £76,000. Most of that growth comes from compounding in the later years.
This is why starting early matters more than starting with a lot of money.
Does compounding apply to investments?
Yes. The same principle applies to investment growth. If your fund (a bundle that holds shares in many companies) grows 7% a year and you reinvest any dividends (payments companies make to shareholders), your money compounds in the same way.
Accumulation funds do this automatically. They reinvest dividends for you instead of paying them out.
Key points about compound interest
- Interest on interest. Your gains earn more gains
- Grows faster over time. The longer you leave it, the bigger the effect
- Why starting early matters. Time is more powerful than amount
- Works for both saving and investing
More information
Scrimpr links to official sources so you can verify what you’ve learned.