Bureau of Wealth

Compound Interest Calculator

By the Bureau of Wealth team Updated

This calculator is general information, not financial advice. Check your own figures with the provider or a qualified adviser before acting on them.

Enter a starting amount, a monthly payment, a rate and a time frame to see your final balance and how much of it is interest rather than money you paid in.

Interest compounds

Check the highlighted fields to see your results.

What this calculator assumes

  • The annual rate you enter stays the same every year. Most savings rates are variable and investment returns rise and fall, so treat the result as an illustration, not a forecast.
  • You pay in the same amount at the end of every month and make no withdrawals.
  • With yearly or daily compounding, the calculator converts the rate to its equivalent growth per month, so money paid in during the year starts growing straight away. An account that adds interest only once a year can pay slightly less.
  • Tax is not deducted. Many people pay no tax on savings interest because of the Personal Savings Allowance, and growth inside an ISA or pension is sheltered from tax.
  • Charges are not included. A fund or platform that takes a yearly fee grows more slowly than the rate you enter.

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How compound interest is worked out

Compound interest means you earn interest on the money you put in and on the interest that has already been added. MoneyHelper explains that the longer you save, the more you benefit, because each new round of interest is worked out on a bigger balance.

The calculator works month by month. It grows the balance by one month's worth of interest at the compounding frequency you choose, then adds your monthly payment. It repeats this for every month of every year, and records what you have paid in and the balance at the end of each year for the table and chart.

A worked example

Say you start with £10,000, pay in £200 a month and earn 6% a year, compounded monthly. After 20 years the balance is £125,510.22. You paid in £58,000 of that, so £67,510.22 is interest, more than you put in yourself.

Time does most of the work. The same plan reaches £50,969.84 after 10 years, of which £16,969.84 is interest. After 30 years it reaches £261,128.76, and interest makes up £179,128.76. The last 10 years more than double the balance, because by then interest is being earned on a much larger sum.

Yearly, monthly or daily compounding

More frequent compounding adds a little, but less than you might expect. On the 20-year example, yearly compounding gives £122,759.08, monthly gives £125,510.22 and daily gives £125,765.32. The rate and the number of years matter far more: the same plan at 4% instead of 6% ends at £95,580.75.

This is why UK savings accounts quote an AER, the annual equivalent rate. It shows what the interest would be worth over a year once compounding is included, so accounts that pay interest at different intervals can be compared fairly. If you enter an AER, choose yearly compounding so the compounding is not counted twice.

Using the result sensibly

For an easy access account, a regular saver or a fixed-rate bond, use the AER you have been offered. For shares and funds there is no fixed rate. Returns vary from year to year and can be negative, so try a cautious rate and a more hopeful one to see a range rather than a single figure.

Look at the year-by-year breakdown as well. In the early years most of the growth comes from what you pay in. Later, interest overtakes it. Starting a few years sooner, or raising your payments when your pay rises, often makes more difference than chasing a slightly higher rate.

Related calculators

If you have a target in mind, the savings goal calculator works backwards from the amount and the date to the monthly payment you need. If you invest through funds or a platform, the investment fees calculator shows how much yearly charges take out of the same compounding.

Frequently asked questions

What is the difference between simple and compound interest?

Simple interest is paid only on the money you put in. Compound interest is also paid on interest already added, so the balance grows faster each year you leave it alone.

Does daily compounding make a big difference?

Not usually. On £10,000 plus £200 a month at 6% for 20 years, daily compounding beats monthly by about £255. The rate you earn and how long you save matter much more.

Should I enter the AER or the gross rate?

The AER already includes compounding, so if you use it, choose yearly compounding. If you have a gross rate paid monthly, enter that rate and choose monthly compounding instead.

Can I use this for a stocks and shares ISA or pension?

You can, as a rough illustration. Investments do not grow at a steady rate and can fall in value, so the result shows what a constant average return would produce, not what will happen.

Why does most of the growth come at the end?

Each year's interest is worked out on a balance that includes all the earlier interest. The balance is largest in the final years, so the interest earned then is largest too.

Sources

Figures come from institutions millions of people rely on. How we keep calculators accurate.