Compound interest means you earn interest on your interest. Each period, your interest is added to the principal, so the next period's interest is calculated on a larger amount.

The Formula

A = P(1 + r/n)^(nt)

  • A = Final amount
  • P = Principal
  • r = Annual interest rate (decimal)
  • n = Number of times interest compounds per year
  • t = Time in years

The Power of Starting Early

Investing £5,000 at 7% annual return starting at age 25 grows to over £75,000 by age 65. Starting at age 35 with the same amount yields only around £38,000 — less than half, despite only 10 fewer years of growth.