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.
The order the fields are filled in makes no difference to the result — the calculator recomputes the whole formula from whatever is currently in every field, not step by step. That means it is safe to adjust one number, watch the result change, and adjust it back, without worrying about resetting anything first.
Why compound interest matters
The formula behind compound interest is standard and has not changed in decades; what changes is the situation it gets applied to. Two households can run the identical calculation and land on very different conclusions once their own numbers — income, rate, term, balance — are dropped in, which is why a generic textbook example is less useful than a calculator you can adjust to match your own circumstances.
It is also useful as a sense check before signing anything. A quote, an offer letter or a spreadsheet from someone else can contain an error, an optimistic assumption, or simply a different convention for rounding — running the same inputs through an independent calculator is a quick way to confirm a number before relying on it.
It is also worth being clear about what a single figure like this can and cannot settle on its own. It answers the specific question the formula was built to answer, and nothing more — a favourable compound interest result does not automatically mean a decision is a good one overall, since plenty of other factors that a formula cannot capture, from personal circumstances to how comfortable a commitment feels, usually matter just as much as the arithmetic. Use the number as one solid input among several rather than the whole of the decision.
In practice, most people arrive at a page like this one having already tried a version of the calculation by hand or in a spreadsheet, and use the calculator here to confirm it rather than replace it. That is a reasonable way to use it — the two should agree to the last decimal place if the same inputs and the same formula are used, and if they do not, the formula shown above is the one to check your own working against first.
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 ×
These figures are only the calculator's own starting values, included so the working is visible rather than hidden inside the tool above. Replace them with your own numbers and the same arithmetic applies — nothing about the method changes, only the inputs feeding it.
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.
A useful check on any unfamiliar result is to compare it against a rough mental estimate first — round the inputs to convenient numbers and see whether the calculator's answer lands in roughly the same territory. A wildly different figure usually means one of the fields was entered in the wrong unit, most often a percentage typed as a whole number where a decimal was expected, or the reverse.
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.
Whenever one of the underlying figures changes — a new interest rate, a different balance, an updated term — since the result only reflects what is currently in the fields. There is no need to keep a separate record of past results; the web address for a filled-in version already carries the figures used to produce it.
Not unless a tax rate or a fee is explicitly one of the inputs above. Where it is not, the figure shown is a gross calculation, and any tax due depends on your personal circumstances and current tax rules, which are worth checking separately.
The arithmetic itself is exact — the calculator applies the formula shown above precisely, with no rounding until the final figure is displayed. The uncertainty, where it exists, is entirely in the inputs: an estimated rate or an approximate balance carries that same approximation through to the result.