Compound Interest Explained
Understand compound interest, the core formula, and how time changes the result.
Overview
Compound interest means interest is earned on both the original amount and the interest already added. Over time this creates a snowball effect and is one of the most important ideas in saving and investing.
The formula
A = P(1 + r / n)^(nt)
Worked example
If you save £5,000 at 5% annual interest for 10 years, the future value is higher when interest compounds regularly than when you use simple interest alone.
Why this calculation matters
Compound interest explains why time matters so much. Small regular growth can produce a much bigger result across several years.
Quick steps
- Start with the principal amount.
- Add the annual interest rate.
- Choose how often the interest compounds.
- Choose the number of years.
- Calculate the future value.
Try the matching tool
Use the live calculator for a faster answer after reading the guide.
FAQ
Simple interest only pays on the original amount. Compound interest also pays on past interest.
More frequent compounding usually increases the final amount slightly.
Yes. It is useful for projecting how savings and investments could grow over time.
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