Albert Einstein allegedly called compound interest the "eighth wonder of the world." Whether he said it or not, the principle is powerful: your money earns interest, and then that interest earns interest. Over time, growth becomes exponential.
Simple vs Compound Interest
Simple Interest
Interest calculated only on the original amount (principal).
- £1,000 at 5% simple interest = £50/year, forever
- After 10 years: £1,500 (£500 in interest)
Compound Interest
Interest calculated on principal PLUS accumulated interest.
- Year 1: £1,000 × 5% = £50 → £1,050
- Year 2: £1,050 × 5% = £52.50 → £1,102.50
- After 10 years: £1,628.89 (£628.89 in interest)
ℹ️ The Difference
Simple interest: £500 over 10 years Compound interest: £628.89 over 10 years That's 25% more earnings from compound interest!
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The Power of Time
Compound interest needs time to work its magic:
- 10 years: Noticeable growth
- 20 years: Significant multiplication
- 30+ years: Exponential explosion
This is why starting early matters so much for retirement saving.
The Rule of 72
Quick mental math: Divide 72 by your interest rate to see how long money takes to double.
- At 4%: 72 ÷ 4 = 18 years to double
- At 6%: 72 ÷ 6 = 12 years to double
- At 8%: 72 ÷ 8 = 9 years to double
Compound Interest Works Both Ways
⚠️ Warning
Compound interest on debt works AGAINST you. Credit card debt at 20% compounds too—in the wrong direction. This is why high-interest debt is so dangerous.
How to Maximize Compound Interest
- Start early: Time is the biggest factor
- Contribute regularly: Monthly additions compound too
- Reinvest returns: Don't withdraw interest
- Find higher rates: Small rate differences compound big
- Be patient: The magic happens over decades
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