Compounding is often called the eighth wonder of the world. The idea is simple: your money earns a return, and then that return starts earning a return too. Over many years, this “growth on growth” snowballs.
A simple example
Say you invest £1,000 and it grows by 7% a year:
| Year | Value at end of year | Growth that year |
|---|---|---|
| 1 | £1,070 | £70 |
| 2 | £1,145 | £75 |
| 5 | £1,403 | £92 |
| 10 | £1,967 | £129 |
| 20 | £3,870 | £253 |
| 30 | £7,612 | £498 |
Notice the growth each year gets bigger, even though the rate stays the same. In year 1 you earn £70; by year 30 you’re earning nearly £500 a year on the same original £1,000.
The Rule of 72
A handy shortcut: divide 72 by your yearly return to estimate how long it takes to double your money.
- At 4% → about 18 years to double
- At 6% → about 12 years
- At 8% → about 9 years
Why starting early matters so much
Imagine two friends who both invest £200 a month at an assumed 7% a year:
- Aisha starts at 25 and stops at 35: 10 years, £24,000 paid in.
- Ben starts at 35 and keeps going until 65: 30 years, £72,000 paid in.
At 65, Aisha’s pot would be worth roughly £281,000, while Ben’s would be around £244,000, even though he paid in three times as much. Aisha’s money simply had more time to compound.
(Illustrative figures, monthly compounding, no fees or inflation. Real returns are never this smooth.)
Things that slow compounding down
- Fees: a 1% yearly fee might not sound much, but over 30 years it can take a big bite out of your final pot.
- Tax: this is where ISAs help: growth inside an ISA is tax-free. See What is an ISA?
- Withdrawing early: taking money out resets the snowball.
- Inflation: rising prices reduce what your money can buy. Think in “real” (after-inflation) terms.
The catch
Compounding works in both directions and investment returns are not guaranteed. Markets can fall sharply, sometimes for years. The examples here assume steady growth, which never happens in real life.
Try it yourself
Use the compound interest calculator to see how different amounts, rates and time frames change the result.
This guide is general information, not financial advice. Your capital is at risk when investing.