The formula
How to calculate compound interest
Compound interest is interest paid on interest. Each period the balance earns a return, that return joins the balance, and the next period earns on the larger figure — which is why the curve steepens the longer money is left alone.
The compounding frequency matters less than people expect. Moving £10,000 at 5% from annual to monthly compounding over ten years adds around £120; moving the rate from 5% to 6% adds more than £1,700. Rate and term do the heavy lifting.
Fill in the following:
- Starting amount — what is in the account on day one
- Annual interest rate (%) — the nominal rate the provider quotes, before compounding is applied
- Term (years)
- Compounds per year — 1 for annual, 4 for quarterly, 12 for monthly, 365 for daily
Everything recalculates as you type, and the numbers in the address bar update with it, so a link to this page carries your figures with it.
Worked example
A concrete run-through, using the values already in the fields:
- Starting amount: 10,000
- Annual interest rate: 5 %
- Term: 10 years
- Compounds per year: 12
That gives:
- Final balance: 16,470.09
- Interest earned: 6,470.09
- Growth multiple: 1.65 ×
Reading the result
The growth multiple is the useful comparison figure: it tells you what each pound turned into, independent of the amount you started with. A multiple of 1.65 means every £1 became £1.65. Doubling takes roughly 72 divided by the rate in years — 7.2 years at 10%, about 14 years at 5%.
Where this goes wrong. These figures ignore inflation and tax. A 5% return with 3% inflation is a real return closer to 2%, and outside a tax-free wrapper the interest is usually taxable in the year it is credited, not when you withdraw.
Simple interest is calculated on the original amount every period, so £10,000 at 5% earns exactly £500 a year forever. Compound interest is calculated on the running balance, so year two earns 5% of £10,500. Over ten years the gap on that balance is roughly £1,500.
Slightly, and the difference shrinks fast. There is a mathematical ceiling: continuous compounding at 5% gives 5.127% a year, and daily compounding already reaches 5.126%. Any provider making a fuss about daily compounding is drawing attention to something worth a few pounds a year.
The headline figure is final balance. With 10,000 starting amount, 5 % annual interest rate and 10 years term, that comes to 16,470.09. Change any field and the figure moves with it.